Buying a home is a major financial milestone, but repaying the long-term loan can take decades. A significant portion of your early payments goes toward interest. However, a simple strategy can reduce this burden: paying one extra Equated Monthly Installment (EMI) each year.
Let's consider an example. Suppose an individual takes a home loan with the following terms:
• Loan Amount: Rs 5,000,000 (50 lakh)
• Interest Rate: 8.5% per annum
• Loan Tenure: 20 years
The monthly EMI for this loan would be approximately Rs 43,391.
Over the full 20-year tenure, the borrower would pay a total of roughly Rs 5,414,000 in interest. This ings the total repayment amount to over Rs 10.4 million, more than double the original loan amount.
Now, consider the impact of making one extra payment of Rs 43,391 each year. This additional payment directly reduces the outstanding principal balance, which in turn lowers the total interest accrued over the life of the loan.
By making 13 payments a year instead of 12, the total interest paid drops to approximately Rs 5,227,000. This results in a total interest saving of around Rs 187,000. Furthermore, the loan would be fully paid off about five months earlier, in 19 years and 7 months.
If your budget allows, making an extra EMI payment is a highly effective strategy. It doesn't require a large lump sum but can significantly accelerate your path to becoming debt-free. Before letting spare cash sit idle, consider using it to make an additional home loan payment and save a substantial amount in the long run.
Source: NDTV Profit
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