Is Increasing EMI or Making Prepayments Better?
Taking out a home
loan is a life-changing decision, filled with excitement about owning a
home but also the reality of a long-term financial commitment. Recently, I
embarked on this journey with HDFC Bank, borrowing ₹15,30,000 at an interest
rate of 8.40% for a 25-year tenure, with a monthly EMI of ₹12,217. However,
life had other plans—my location changed, and I had to close the loan early.
This experience left me reflecting on how I could have managed the loan better,
particularly whether increasing the EMI
or making annual prepayments would have been the smarter choice to pay it
off faster. In this blog, I share my personal insights, backed by detailed
calculations, to help you decide which strategy—increasing EMI or prepayment—is
better for closing a home loan early. If you’re grappling with a similar
decision, read on for a realistic, practical perspective.
My Home Loan Story: A Personal Reflection
When I took the ₹15,30,000 home loan from HDFC Bank, I was
excited about owning a home. The EMI of ₹12,217 felt manageable, but the
25-year tenure meant I’d be paying ₹21,35,100 in interest alone—more than the
loan amount itself! Then, life threw a curveball: my job required relocation,
and I had to close the loan sooner than expected. This got me thinking about
how I could have reduced the tenure and interest burden had I stayed. I started
researching two common strategies: increasing the monthly EMI or making
lump-sum prepayments annually. Both seemed promising, but which was better for
a home loan like mine? To find out, I crunched the numbers, and here’s what I
learned.
Understanding the Home Loan Basics
Before diving into the comparison, let’s break down my loan
details:
- Loan
Amount: ₹15,30,000
- Interest
Rate: 8.40% per annum (monthly rate: 0.7%)
- Tenure:
25 years (300 months)
- EMI:
₹12,217 per month
- Total
Repayment: ₹12,217 × 300 = ₹36,65,100
- Total
Interest: ₹36,65,100 - ₹15,30,000 = ₹21,35,100
Without any changes, I’d be paying over ₹21 lakh in interest
over 25 years. That’s a staggering amount! Closing the loan early became my
goal, and I explored two options: increasing my EMI by ₹2,000 to ₹14,217 per
month or prepaying ₹1,00,000 annually. Here’s how each strategy stacks up,
based on precise calculations.
Option 1: Annual Prepayment of ₹1,00,000
Prepaying a home loan involves paying a lump sum to reduce
the principal, which can shorten the tenure or lower the EMI. Most banks,
including HDFC, apply prepayments to reduce the tenure for floating-rate loans,
which saves more interest. I assumed I could save ₹1,00,000 each year—maybe
from a bonus or savings—and apply it at the end of every 12 months.
How Prepayment Works
Each month, the EMI splits into interest and principal
repayment. At the start of a home loan, the bulk of your EMI covers interest
costs. For example, in the first month:
- Interest
= ₹15,30,000 × 0.007 = ₹10,710
- Principal
Repaid = ₹12,217 - ₹10,710 = ₹1,507
- New
Principal = ₹15,30,000 - ₹1,507 = ₹15,28,493
After 12 EMIs, I’d repay about ₹18,569 of the principal,
leaving ₹15,11,431. A ₹1,00,000 prepayment reduces this to ₹14,11,431. Using
the loan amortization formula, the new tenure for ₹14,11,431 at ₹12,217 EMI is
about 274 months. Repeating this process annually—12 EMIs followed by a
₹1,00,000 prepayment—accelerates principal reduction.
After about 13 years of ₹1,00,000 annual prepayments (total
₹13,00,000), the principal drops to around ₹1,50,000–₹2,00,000, with a
remaining tenure of 12–18 months. The total tenure shrinks to approximately 14
years (168 months).
Prepayment Results
Total Repayment: ₹12,217 × 168 = ₹20,52,456
Total Interest: ₹20,52,456 - ₹15,30,000 = ₹5,22,456
Savings:
Tenure Reduction: 300 - 168 = 132 months
(~11 years)
Interest Savings: ₹21,35,100 - ₹5,22,456 = ₹16,12,644
Prepaying ₹1,00,000 yearly saved me a whopping ₹16.12 lakh
in interest and cut the loan tenure by 11 years. But saving ₹1,00,000 annually
isn’t easy—it requires discipline or a windfall like a bonus.
Option 2: Increasing EMI to ₹14,217
The second option was increasing my EMI by ₹2,000 to ₹14,217
per month. This spreads the extra payment evenly, making it easier to budget
compared to a lump-sum prepayment. A higher EMI reduces the principal faster
each month, shortening the tenure.
EMI Increase Calculation
Using the loan amortization formula:
Principal: ₹15,30,000
EMI: ₹14,217
Monthly Rate: 0.007
New Tenure: Approximately 210 months (~17.5 years)
Increased EMI Results
Total Repayment: ₹14,217 × 210 = ₹29,85,570
Total Interest: ₹29,85,570 - ₹15,30,000 = ₹14,55,570
Savings:
Tenure Reduction: 300 - 210 = 90 months (~7.5 years)
Interest Savings: ₹21,35,100 - ₹14,55,570 = ₹6,79,530
Increasing the EMI saved ₹6.79 lakh in interest and reduced
the tenure by 7.5 years. It’s a significant saving, but less than prepayment.
Comparing the Two: Which Is Better?
Here’s a side-by-side comparison of the options:
|
Option |
Tenure |
Total Interest Paid |
Interest Savings |
Tenure Reduction |
|
Current EMI |
25 years (300m) |
₹21,35,100 |
- |
- |
|
Prepayment (₹1L/yr) |
14 years (168m) |
₹5,22,456 |
₹16,12,644 |
11 years (132m) |
|
Increased EMI (₹14,217) |
17.5 years (210m) |
₹14,55,570 |
₹6,79,530 |
7.5 years (90m) |
Prepayment clearly outperforms, saving ₹16.12 lakh in
interest versus ₹6.79 lakh with increased EMI—a difference of ₹9.33 lakh. It
also shaves off an extra 3.5 years. The tricky part is committing to ₹1,00,000
annually for faster repayment. In my case, scraping together that amount yearly
would have been tough unless I had a bonus or cut back on expenses. Increasing
the EMI by ₹2,000 (₹24,000/year) felt more manageable, as it fit into my
monthly budget without needing a lump sum.
My Take: What I Would Have Done
Reflecting on my HDFC loan experience, I realized prepayment
is ideal if you have access to lump sums, like bonuses or investment returns.
It’s like hitting the fast-forward button on your loan, slashing interest and
tenure dramatically. But for someone like me, with a steady income but no large
windfalls, increasing the EMI was more practical. Adding ₹2,000 monthly didn’t
disrupt my lifestyle much, yet it still saved significant interest.
If I hadn’t closed my loan due to relocation, I would have
started with a modest EMI increase and made prepayments whenever I received
extra funds. Many banks, including HDFC, allow penalty-free prepayments on
floating-rate loans, so checking your bank’s policy is crucial. I also learned
to use online loan calculators or consult the bank for precise figures, as
small variations in timing can affect savings.
My Thoughts on Home loan strategy
Closing my HDFC home loan early taught me the importance of
proactive repayment strategies. Whether you choose to increase EMI or prepay,
both can save you money and time compared to sticking with the original plan. Prepayment
offers bigger savings but requires discipline to save lump sums. Increasing EMI
is easier on cash flow and still effective. My advice? Assess your finances,
check your bank’s prepayment rules, and use a loan calculator to see what works
for you. If I could go back, I’d blend both strategies—small EMI hikes and
occasional prepayments—to balance savings and flexibility.
Have you tried prepaying or increasing your EMI? Share your
experience in the comments—I’d love to hear what worked for you!
Use our Home Loan Calculator
Frequently Asked Questions (FAQs)
Q1: Is it better to increase EMI or prepay annually?
A: Prepayment saves more interest and reduces the loan tenure
significantly. But increasing EMI is easier for many salaried individuals.
Choose based on what fits your financial comfort.
Q2: Will prepayment attract any penalty?
A: Most floating-rate home loans in India, especially from banks like
HDFC, do not attract prepayment penalties. Always check your loan agreement.
Q3: Can I do both – increase EMI and make prepayments?
A: Yes, absolutely. This combination can close your loan even faster and
maximise your savings.
Q4: How does prepayment reduce loan tenure?
A: When you prepay, your principal drops. Since EMI remains the same, a
larger part of it now goes toward the principal, effectively reducing the
remaining tenure.
Q5: Is it better to prepay in the early years?
A: Yes. In the early years, the interest portion of EMI is higher. So
prepaying early reduces your interest burden significantly.
Q6: What if I can only prepay a small amount?
A: Any amount helps. Even partial prepayments once or twice a year make
a noticeable impact over time.
Q7: How do I inform the bank about prepayment?
A: Visit your home branch or use your loan account portal. Make sure to specify that the payment is for principal prepayment and request a revised amortization schedule.
