A Home Loan is one of the biggest financial commitments that most of us make. Home Loan help us bridge the gap of the dream of owning our own house but it also ties us down for 15 – 20 years costing us lakhs in interest. And truth be told; nobody likes to pay interest. So, we are always on the lookout for hacks and tricks about how can you reduce your home loan interest or how can you reduce your home loan tenure. Today, we have got just the right thing for you. A simple trick that could help you reduce your home loan tenure much sooner and save lakhs of rupees in interest? This one small step each year by you could reduce your effective home loan interest.
Here’s the hack: Pay just 1 extra EMI every year. Done consistently, this can reduce your loan tenure by up to 4 years and help you save up to 20% in interest outflow. Let’s understand the hack in detail.
🎯 Quick Summary:
- Hack: Pay 1 extra EMI each year (or spread it across months) to reduce home loan tenure by 20% and finish it 4 years earlier.
- Example: ₹70L Loan, 20y Tenure @ 9%: Tenure 240 → 195 months; interest drops from ₹81.15L → ₹63.02L; saving ₹18.13L (22%). 💰📉
- Why it works: Extra EMI hits principal directly → lower future interest → higher principal each EMI, creating a compounding snowball. 🔁
- Before you execute: Check prepayment rules/charges (esp. fixed-rate loans), minimum months, and mode (online/offline). ⚠️
- Tax note: 80C & 24(b) mainly under Old Regime; in New Regime, tax breaks are limited—prepaying is even more attractive. 📑✅
Breaking Down Home Loan
Every EMI that you pay towards your Home Loan, it gets divided into two parts:
Interest: The cost of borrowing the amount, calculated monthly on your outstanding loan amount.
Principal: The amount that you borrowed, gets repaid with each EMI.
In the early years, a large portion of your EMI goes towards interest payments because of the high outstanding principal amount. This is also the reason why even after paying EMIs in initial years, your principal may barely move.
We plotted a graph to show you how the interest payments and principal repayments look over the period of your home loan. Home Loan taken for example is ₹70 Lakhs for a period of 20 Years at 9% rate of interest.
Source:- EduFund Internal Research
As you would observe, in the initial years the interest amount paid is high while the principal amount repaid is lower, and as you go forward the principal repayments go up. As a result, the outstanding amount and the interest amount go down. The total interest you paid over the home loan tenure is ₹81,15,396 which is even higher than the original loan amount.
Now let’s say you make an extra EMI payment. This extra EMI payment goes to reduce your outstanding principal directly – which in turn reduces future interest payments creating a compounding effect.
Let’s take an example of the same home loan; the regular EMIs will go as is and an extra EMI will be made at the beginning of each year.
So, in the first EMI you will pay an amount equal to two EMIs; then you would again pay an amount equal to two EMIs next year i.e. Month 13 and so on. You keep on paying regular EMIs in between. Let’s see the difference.
With regular EMIs, the total interest paid was ₹81.15 Lakhs with 240 months (20 years) of repayment period. With just 1 extra EMI at the beginning of each year, your loan would end in 195 months which is almost 4 years earlier; reducing your home loan tenure by about 20%.
The total interest repaid also drops to ₹63.02 Lakhs thereby reducing your home loan interest outflow by 22%. Surprising? No, it is simple math. Let’s understand better through a comparison.
| Month | Normal Home Loan | Normal Home Loan | Normal Home Loan | 1 Extra Home Loan EMI a Year | 1 Extra Home Loan EMI a Year | 1 Extra Home Loan EMI a Year |
|---|---|---|---|---|---|---|
| Interest Paid | Principal Repaid | Outstanding Balance | Interest Paid | Principal Repaid | Outstanding Balance | |
| 1 | 52,500 | 10,481 | 69,89,519 | 52,500 | 73,462 | 69,26,538 |
| 12 | 6,24,680 | 1,31,090 | 68,68,910 | 6,19,285 | 1,99,466 | 68,00,534 |
| 48 | 24,20,215 | 6,02,864 | 63,97,136 | 23,57,686 | 9,17,316 | 60,82,684 |
| 84 | 40,70,139 | 12,20,249 | 57,79,751 | 38,74,526 | 18,56,728 | 51,43,272 |
| 120 | 55,29,510 | 20,28,188 | 49,71,812 | 51,01,421 | 30,86,085 | 39,13,915 |
| 156 | 67,39,515 | 30,85,493 | 39,14,507 | 59,48,881 | 46,94,877 | 23,05,123 |
| 180 | 73,70,545 | 39,66,002 | 30,33,998 | 62,46,602 | 60,34,657 | 9,65,343 |
| 204 | 78,28,632 | 50,19,455 | 19,80,545 | 63,01,955 | 70,00,000 | 0 |
| 228 | 80,79,806 | 62,79,820 | 7,20,180 | 63,01,955 | 70,00,000 | 0 |
| 240 | 81,15,396 | 70,00,000 | 0 | 63,01,955 | 70,00,000 | 0 |
Source:- EduFund Internal Research
Notice how the principal repaid is higher and interest paid, and outstanding balance is lower every month if you pay an extra EMI every year.
Three Reasons Why the Impact is Big
– Every Extra EMI you pay is pure principal repayment. This reduces your total outstanding amount. Lower outstanding amount means lower interest.
– Lower Interest means higher principal repayment in next EMI thus further reducing your total outstanding amount. The cycle continues.
– You keep paying similar amount rather than reducing your EMI. This means the loan gets repaid faster and hence the EMI tenure finishes early.
All of this, not with lakhs of repayment but with just one extra EMI every year.
Before you execute this Hack
Here is what you should check to avoid getting charged or penalized. Check if there are any prepayment charges in your Home Loan.
Most floating rate home loans do not have any prepayment charges but if you have a fixed rate home loan, you might want to confirm the same before prepaying the loan. It is always good to confirm with your lender regardless of your home loan type.
Also understand, if there are any specific rules with prepayment. For example, you can only start prepayment after certain months, or prepayment is only allowed through online transfers or offline payments.
Tax Benefits
Most of us are okay to keep our home loans running because of the tax benefits available through Section 80C for deduction of Principal Repayments and through Section 24(B) for deduction of interest paid amount.
But the deductions are applicable only when you are filing your taxes under the old regime. And with the latest budget, the New Tax Regime is more beneficial for most of us than the Old Tax Regime which can be useful for a few taxpayers who have numerous deductions to claim.
So, if you file your taxes under the new tax regime, home loan is purely a cost for you so the faster you repay, the better it is for you.
Closing Notes
One extra EMI may seem like a burden to you but once you understand the impact it has over the years, it is buying you lakhs of additional savings that would have gone towards paying interest otherwise.
If you want to, you can also divide the additional EMI across the full year and pay slightly higher amounts every month. It doesn’t matter if you do it at once, or break it across 12 months, what matters is you stay consistent. Over time, you will thank yourselves for making this small yet impactful move.
People Also Ask
1. Is it better to reduce tenure or EMI?
It is better to reduce the tenure. If you reduce your EMI, most likely the interest that you end up paying at the end of your home loan would be the same or won’t reduce much. But if you maintain the same EMI amount, it will reduce your tenure of your home loan; effectively reducing your total interest outflow.
2. What happens if I pay 2 EMI extra every year?
It will further reduce your home loan tenure and your total interest outflow. Every additional payment you make goes straight towards reducing your outstanding principal amount, helping you repay faster and reducing your interest amount.
3. Is it good to repay home loan early?
Yes! Now that most of individual taxpayers are likely to adapt to the new tax regime, there are no deduction benefits available for home loan. Hence, it is a pure expense for the taxpayer.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
