LIGHTENING THE HOME LOAN BURDEN: Pay one extra EMI to lessen the pain

financialexpress.com:

At a time when home loan interest rates are over 9% and likely to remain high till the inflation outlook improves, existing borrowers need to look at various options to prepay the loan periodically and reduce the interest burden without sacrificing their existing investments for achieving crucial financial goals. The Reserve Bank of India in its bi-monthly monetary policy meet has kept the repo rate unchanged at 6.5% for the fourth consecutive time.

A borrower with limited liquidity can prepay one extra EMI every year. Second, he can pay 5% of the loan amount every year. A third option would be to prepay 5% of the loan balance every year (lenders apply monthly reducing balance method for interest calculation). Those with sufficient liquidity can aggressively pay 10% of the loan amount or the outstanding balance to reduce the interest payout significantly.

However, before aggressively prepaying the home loan, a borrower must do the math on the effective interest rate after factoring in the income tax benefits under Sections 80C and 24 B on deductions on the interest of a home loan.
Smart strategy

For example, if an individual has borrowed Rs 50 lakh at 9% for 20 years, then the total interest payout will be around Rs 58 lakh, assuming the interest rate remains the same. If the borrower pre-pays an extra EMI every year, then the total interest payout will be Rs 45 lakh, or savings of Rs 13 lakh and reduction of 45 months of the loan tenure.

Alternatively, if a borrower prepays 5% of the loan amount annually, he will save `35 lakh of interest and the tenure will reduce to 109 months from the original 240. If he prepays 5% of the outstanding balance every year, the savings on interest will be `31.53 lakh and the tenure will