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Home Loan Prepayment Calculation - Reduce EMI or Tenure? [VIDEO]

FinCalC September 15, 2021
I have already explained you about the advantages of home loan prepayment here. But the main question is, whether we should Reduce EMI or Tenure while making Home Loan prepayments?

It is best to reduce loan tenure and keep EMI same, after making home loan prepayments since it will help you to close your loan as soon  as possible. Also, the interest you'll pay after reducing loan tenure will be less compared to the interest you'll pay after reducing EMI.
The longer the duration of your home loan, more interest you will pay. We will see all this with the help of examples.

You can download the home loan excel calculator using the link at the bottom of this article.

But first understand how home loan calculator works, using below video:


Above video contains information about how to calculate EMI on home loan, how principal and interest amounts are calculated, how home loan interest change will effect the interest you will pay in home loan, explanation about reducing EMI or loan tenure with examples and much more.


How Home Loan EMI is Calculated in Excel:
  • I have already explained about home loan EMI calculation here
  • Home loan EMI can be easily calculated in excel using PMT function
  • PMT function takes 3 parameters: Interest Rate, Remaining months and Principal value remaining
  • Interest rate provided should be the monthly home loan interest rate divided by 100
  • Remaining months is the number of months remaining for which EMIs are yet to be paid
  • Principal value is the outstanding principal amount remaining in your loan account
  • Remember, your EMI consists of 2 things: Principal Amount and Interest Amount
  • Interest Amount is high initially, and decreases with time
  • Principal Amount is low initially, and increases with time


Screenshot of Home Loan formula used in Excel


Above excel formula of PMT can be used to calculate EMI of your Home Loan.

In case you still find it difficult, download the home loan excel calculator using the link at the bottom of the video and provide required details to calculate your home loan EMI.


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Why home loan prepayments?
  • While you pay your loan EMIs every month, you should consider making some prepayments to save loan interest
  • Loan prepayments is the procedure of paying some extra amount (usually twice your EMI amount) to save your loan interest
  • Loan prepayments help you to Reduce your principal outstanding balance which reduces the loan interest you pay via your EMIs
  • You can easily make prepayments by filling the prepayment form in bank or financial institution from where your loan is disbursed
  • But make sure that you don't use all of your funds just to make loan prepayments. Loan prepayments are to save loan interest, not to compromise on your daily needs by using the funds you need
  • Do not take another loan just to prepay your existing home loan



Procedure for Home Loan Prepayment:
  • You can make home loan prepayments very easily by filling loan prepayment form
  • Apart from filling prepayment form, you need to submit a cheque of required amount to prepay
  • Also you need to submit 3 months bank statement as a proof of sufficient funds in your account
  • After submitting these document, bank will ask you whether you want to reduce EMI or Tenure
  • Reducing EMI will reduce your EMI amount you pay every month, but will keep the tenure same
  • Reducing Tenure will reduce the number of months you will be paying your EMIs

What do you think? Reducing EMI is better option or should be Reduce Tenure?
Read on to know whether to Reduce EMI or Tenure after home loan prepayment with proofs.


Reduce EMI or Tenure?

To understand prepayments more clearly, let's take an example of home loan:
Principal Amount = Rs. 40 Lacs
Interest rate = 8% pa
Tenure = 25 years

Below is the screenshot of EMI, Principal and Interest with No Prepayments:


Home Loan stats with No Prepayments

You can see, EMI = Rs. 30,873 and total Interest you pay is Rs. 52,61,795

Note: Above numbers are specifically for mentioned Principal Amount, Interest rate and tenure. Your EMI and total Interest figures would differ based on your values of Principal Amount, Interest rate and tenure. You can check your numbers with the excel document provided at the bottom of this article.

Now, when you make a prepayment of Rs. 1,00,000 in the 6th month, and Reduce EMI and keep tenure Same, we get savings in Interest of Rs. 1,28,905 as shown below:


Reduce EMI with Prepayment


When you make same prepayment of Rs. 1,00,000 in the 6th month, and Reduce Tenure and keep EMI Same, we get savings in Interest of Rs. 5,62,767 as shown below:


Reduce Tenure with Prepayment


Above screenshots prove that reducing tenure after making prepayment is much more beneficial to save your home loan interest compared to reducing EMI.

So to summarize, below is the table that gives you home loan prepayment interest saving stats for the home loan example we have considered:


Home Loan Interest Saving with prepayment options

Note: The stats are applicable only for the numbers mentioned in above example. The interest savings numbers would differ from your example based on principal amount, interest rate, tenure and loan prepayment amount paid.




Benefits of Home Loan Prepayment:
  • As seen above, making home loan prepayments will definitely help you save your home loan interest
  • Remember, it only saves the interest you have to pay, the principal amount you have taken needs to be paid in full till the end of loan tenure
  • Reducing Tenure after making loan prepayments proves to save a lot of interest compared to reducing EMI
  • In case you cannot afford EMI in upcoming months, you can also choose to reduce EMI after prepayment
  • You can close your loan with proper prepayment planning and reducing tenure
  • Remember to go for low interest rate while taking home loan, since it will ultimately help you pay less interest


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Frequently Asked Questions (FAQs):

Q. What does an EMI mean?

Ans. EMI refers to the ‘Equated Monthly Installment’ which is the amount you will pay on a specific date each month till the loan is repaid in full. The EMI comprises of the principal and interest components which are structured in a way that in the initial years of your loan, the interest component is much larger than the principal component, while towards the latter half of the loan, the principal component is much larger.

Q. What is a Home loan and how does it work?

Ans. Home loans are availed either for purchase of an under-construction or a ready property from a developer, purchase of a resale property, to construct a housing unit on a plot of land, to make improvements and extensions to an already existing house and to transfer your existing home loan.

Q. When can I make a home loan application?

Ans. You can apply for a Home Loan whilst you are working abroad, to plan for your return to India in the future. You can apply at any time once you have decided to purchase or construct a property, even if you have not selected the property or the construction has not commenced.

Q. When does my home loan EMIs start?

Ans. EMI's begins from the month subsequent to the month in which disbursement of the loan is done. For loans for under-construction properties EMI usually begins after the complete home loan is disbursed but customers can choose to begin their emi’s as soon as they avail their fist disbursement and their emi’s will increase proportionately with every subsequent  disbursement. For resale cases, since the whole loan amount is disbursed in one go, emi on the whole loan amount start from the subsequent to the  month of disbursement

Q. How does your home loan repayment work?

Ans. A home loan is usually repaid through Equated Monthly Instalments (EMI).The EMI comprises of the principal and interest components which are structured in a way that in the initial years of your loan, the interest component is much larger than the principal component, while towards the latter half of the loan, the principal component is much larger.

Q. How can I save home loan Interest?

Ans. There are many ways to save home loan Interest. You can make prepayments in your ongoing loan to save interest, you can increase your loan EMI every year by some percentage to reduce your loan interest. If you are planning to take a home loan, you should go for less interest rate and less tenure to keep your loan interest less throughout your loan tenure.

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