How to Pay off Housing Loan Debt Quickly

Let’s say you’ve taken a home loan of ₹25 lakhs for 25 years at an interest rate of 8.5%. Based on this, your monthly EMI comes out to be ₹20,130, as shown by most loan calculators. Now, imagine paying this EMI consistently for five years—60 months of on-time payments. You’ve already paid nearly ₹12 lakhs by multiplying the EMI by 60 months.

Now, logically, you might think, “I’ve paid ₹12 lakhs, and the original loan was ₹25 lakhs, so my remaining balance must be around ₹13 lakhs.” However, that’s far from reality. The actual remaining amount you’ll need to repay is ₹23,19,675. Shocking, right?

Why Does This Happen?

Home loan amortization, or how your payments are structured over time, is the key here. In the early years of a home loan, most of your EMI goes toward paying interest, with only a small portion going toward reducing the principal. This means that even though you’ve paid ₹12 lakhs over 5 years, only around ₹2 lakhs of your original loan amount has been reduced.

Let’s break it down further. In the first year, out of the ₹20,130 you pay each month, around ₹17,700 goes toward the interest and only ₹2,400 toward the principal. By the end of the year, after paying ₹2,41,560, the principal repayment would be only around ₹30,000. The rest? All interest.

This process continues for many years, and only after about 16 years does your principal repayment start to outpace the interest portion. By the time your loan tenure is over, you’ll have paid nearly ₹60 lakhs for a ₹25 lakh loan!

Optimizing Your Loan Strategy

If you’re currently considering taking a home loan or already have one, understanding how the amortization process works will help you make better decisions. Here are three key factors to manage your loan wisely:

1. Loan Amount: The more you borrow, the more you’ll repay in interest. Ideally, try to save up at least 40% of the home’s value before taking a loan. This helps reduce the overall loan amount and puts you in a stronger financial position.
2. Interest Rate: Your interest rate depends on factors like your credit score, employment type (salaried vs. self-employed), and whether you opt for a floating or fixed interest rate. If you have a high credit score (above 750), you can negotiate better terms with the bank. Make sure to regularly check your credit score for free on websites like Paisa Bazaar, which also provides monthly updates.
3. Loan Tenure: The longer your loan tenure, the more interest you’ll pay over time. While it might seem convenient to lower your monthly EMI by opting for a longer tenure, you’ll end up paying much more in the long run. If possible, choose a shorter tenure and plan to pay off the loan faster.

What If You Already Have a Home Loan?

If you’ve realized that you’re paying a large portion of your EMIs as interest, don’t worry. One of the best ways to save on interest is by making prepayments. A prepayment is when you pay an extra amount toward the principal, thereby reducing the overall interest burden. Even making small, regular prepayments can save you lakhs in interest.

For example, if you make a one-time prepayment of ₹1 lakh in the 5th year of your loan, you could save around ₹4.5 lakhs in interest over the loan’s tenure. If you can’t make such a large prepayment, consider making smaller additional payments, such as one extra EMI per year. This can help reduce your loan term significantly, sometimes cutting it down from 25 years to 15 years!

Conclusion

Taking a home loan is a long-term financial commitment, and understanding how much of your payments go toward interest is crucial. By carefully managing your loan amount, interest rate, and tenure, and by making regular prepayments, you can save lakhs of rupees and pay off your home loan much faster.

If you found this information useful, share it with friends and family who might be taking a home loan or are already managing one.