- Home loan interest can nearly equal the initial principal amount.
- Increasing monthly EMI slightly reduces total interest and loan tenure.
- Adding just Rs 2,000 to EMI saves lakhs in interest.
Home loans are long-term commitments, and the real cost often goes far beyond the amount borrowed. While the loan helps you buy a house today, the interest paid over 15 to 25 years can be almost as large as the loan itself. For example, on a Rs 1 crore home loan at an interest rate of 8.25 per cent for 20 years, the monthly EMI comes to around Rs 85,207.
Over the full tenure, the borrower ends up paying nearly Rs 2.04 crore in total. Of this, around Rs 1.04 crore is interest alone. This is why even a small increase in EMI can make a big difference. By increasing the EMI by just Rs 2,000 per month, the borrower can reduce both the total interest outgo and the loan tenure.
Home Loan Assumptions Particulars Amount / Value Loan Amount Rs 1,00,00,000 Interest Rate 8.25 per cent p.a. Original Tenure 20 years / 240 months Original EMI Rs 85,207 Increased EMI Rs 87,207 Case 1: Normal EMI of Rs 85,207 If the borrower continues with the original EMI of Rs 85,207, the loan runs for the full 20-year period.
Particulars Amount Monthly EMI Rs 85,207 Tenure 240 months Total Amount Paid Rs 2,04,49,680 Principal Amount Rs 1,00,00,000 Total Interest Paid Rs 1,04,49,680 So, with the normal EMI, the borrower pays around Rs 1.04 crore as interest over 20 years. Case 2: EMI Increased to Rs 87,207 Now assume the borrower increases the EMI by only Rs 2,000 per month. The EMI rises from Rs 85,207 to Rs 87,207. This small increase helps repay the principal faster. As a result, the loan does not continue for the full 240 months. Instead, it closes in around 227 months, or roughly 18 years and 11 months.
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Particulars Amount / Value New EMI Rs 87,207 Revised Tenure Around 227 months Tenure Reduced By Around 13 months Total Amount Paid Around Rs 1,97,64,951 Principal Amount Rs 1,00,00,000 Total Interest Paid Around Rs 97,64,951 Total Saving from Rs 2,000 Extra EMI Particulars Amount Interest Paid with Normal EMI Rs 1,04,49,680 Interest Paid with Higher EMI Rs 97,64,951 Total Interest Saving Rs 6,84,729
By increasing the EMI by just Rs 2,000 per month, the borrower can save approximately Rs 6.85 lakh in interest. The loan tenure also reduces by around 13 months. Why Does This Small EMI Increase Save So Much? The reason is simple. In the early years of a home loan, a large part of the EMI goes towards interest, while a smaller portion goes towards principal repayment.
For the first month, interest on a Rs 1 crore loan at 8.25 per cent works out to: Rs 1,00,00,000 x 8.25 per cent / 12 = Rs 68,750 Now see how the EMI split changes: Particulars Normal EMI Higher EMI EMI Rs 85,207 Rs 87,207 Interest Portion Rs 68,750 Rs 68,750 Principal Repaid in Month 1 Rs 16,457 Rs 18,457 The extra Rs 2,000 does not go towards interest. It directly reduces the outstanding principal. Once the principal falls faster, the interest for the next month is calculated on a lower loan balance. This cycle continues month after month. That is how a small monthly increase creates a much larger saving over the full loan tenure.
Outstanding Loan Comparison Period Outstanding with Rs 85,207 EMI Outstanding with Rs 87,207 EMI After 1 year Rs 97.95 lakh Rs 97.70 lakh After 5 years Rs 87.83 lakh Rs 86.35 lakh After 10 years Rs 69.47 lakh Rs 65.76 lakh After 15 years Rs 41.77 lakh Rs 34.70 lakh Around 18 years 11 months Loan still pending Loan closes The benefit may look small in the first few years, but it becomes much more visible later. This is because faster principal repayment keeps reducing the interest burden every month.
Conclusion
A home loan is not just about getting the lowest interest rate. It is also about managing repayment smartly. If your income allows it, increasing your EMI by a small amount can help you save lakhs of rupees and close your loan earlier. In this example, an additional Rs 2,000 per month saves nearly Rs 6.85 lakh and reduces the loan tenure by around 13 months. Before making any change, borrowers should check with their lender for prepayment rules, EMI reset options and other applicable terms. But as a money-saving strategy, a small EMI step-up can be one of the simplest ways to reduce the real cost of a home loan.
(Disclaimer: This article uses information originally published by Dalal Street Investment Journal (DSIJ). The views expressed are those of the original authors and not necessarily of ABP Network Pvt. Ltd. This content is provided for general informational and educational purposes only and should not be construed as investment, financial, legal or tax advice. Readers are advised to conduct their own research and/or consult a qualified financial advisor before making any investment decisions. This content is for informational purposes only and should not be treated as investment advice. ABP Network, its employees and associates shall not be responsible or liable for any losses or damages arising directly or indirectly from the use of or reliance on this article or any information contained herein.)
