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Taking a home loan is often the biggest financial decision of a person’s life. While buying a house fulfills a long-cherished dream, the long tenure of a home loan means you usually end up paying much more in interest than the original loan amount. Loans taken for 20, 25, or even 30 years can significantly increase the total repayment burden.

However, with a small but smart strategy, you can save lakhs of rupees in interest and also close your loan several years earlier. One of the most effective methods is paying just one extra EMI every year. Let us understand this with clear numbers and simple calculations.

₹50 Lakh Home Loan: Complete Break-Up

Let’s assume the following standard home loan scenario:

• Loan amount: ₹50,00,000

• Loan tenure: 20 years

• Interest rate: 8.5% (fixed for illustration)

• Monthly EMI: ₹43,391

Under this structure:

• Total interest paid over 20 years: ₹54,13,879

• Total amount paid to the bank: ₹1,04,13,879

This means you pay more than ₹54 lakh as interest, which is even higher than the principal loan amount of ₹50 lakh. In simple words, you end up paying over ₹1.04 crore for a ₹50 lakh loan.

Why Interest Burden Is So High in Long-Term Loans

In the initial years of a home loan, a major portion of each EMI goes towards interest, while only a small amount reduces the principal. This is because interest is calculated on the outstanding loan amount, which is highest at the beginning.

As a result, even after paying EMIs regularly for several years, the loan balance reduces slowly. This is where early prepayment makes a huge difference.

Power of One Extra EMI Every Year

Now let’s look at what happens if you make a small change.

Assumption for Extra EMI Strategy:

• Loan starts in January 2026

• From the second year (February 2027), you pay one additional EMI every year

• Extra EMI amount: ₹43,391

• Interest rate remains at 8.5%

The Result:

• Interest saved: Approximately ₹10.3 lakh

• Loan tenure reduced: Several years shorter than 20 years

This means that by paying just one extra EMI annually, you can save over ₹10 lakh in interest alone, along with the benefit of becoming debt-free much earlier.

Why Paying Extra EMI Early Works Best

The best time to prepay a home loan is during the initial years. Since interest dominates EMIs at the beginning, any reduction in principal at this stage drastically reduces the future interest calculation.

Using bonuses, salary hikes, incentives, or tax refunds for early prepayment delivers maximum benefit compared to making extra payments in the later years of the loan.

Does Prepayment Help in All Types of Home Loans?

Yes. Prepayment reduces the outstanding principal, so it benefits all types of home loans, including:

• Fixed interest rate loans

• Repo-linked loans

• MCLR-based floating rate loans

However, keep these points in mind:

• Floating rate loans usually come with no prepayment penalty

• Fixed rate loans may have prepayment charges, so always check loan terms before making extra payments

The earlier you prepay, the greater the interest savings—regardless of loan type.

Do You Need to Inform the Lender for Extra EMI?

Yes, prepayment is not automatic. You can make extra EMI payments through:

• Net banking

• Visiting the bank branch

• Standing instructions

Make sure to clearly instruct the bank that the extra payment should reduce the principal and loan tenure, not the EMI amount. Reducing tenure results in much higher interest savings than reducing EMI.

Most banks allow penalty-free prepayment for floating rate loans, but annual extra EMI payments need to be done manually.

Smart Prepayment Strategy to Follow

Before committing to extra EMIs, ensure your financial foundation is strong:

• Maintain at least 6 months’ emergency fund

• Have adequate term life insurance and health insurance

• Continue essential long-term investments

Once these are in place, use bonuses, salary increments, or tax refunds for yearly prepayment. Even cutting down small unnecessary expenses can help you arrange funds for one extra EMI annually.

This approach is safe, disciplined, and highly effective in reducing long-term financial stress.

Final Takeaway

A home loan does not have to remain a 20–30 year burden. With a simple habit of paying one extra EMI every year, you can save over ₹10 lakh in interest and shorten your loan tenure significantly.

It is a small step with a powerful impact—helping you own your home faster and keep more of your hard-earned money.

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