With any loan, the longer your tenor, the more interest you will end up paying. Naturally, if you’re looking to save on interest, the best solution is to decrease your loan tenor whenever possible.
There are two effective ways to go about it, first, you pay opt to pay higher EMIs, even when the home loan interest rate shifts favourably.
Here is an example to help you understand this better.
Assume that you’ve borrowed a home loan of Rs. 50 lakhs at an interest rate of 11% and a tenor of 20 years. Now, the lender reduces the interest rate to 10.75%. As a result, the revised EMI will be Rs. 50,671 for the tenor. However, if you choose to pay the initial EMI of Rs. 51,610, the loan tenor will be reduced by 1 year. By paying this higher EMI, you will save Rs. 6.71 lakh on interest over the course of repayment.
The second way to reduce your tenor is to make partial prepayments. When you prepay a portion of the outstanding principal, you can request the lender to reduce the loan tenor when adjusting for the revised principal. In this case, your EMI won’t reduce, but you’ll service the loan for a shorter period. An easy way to know exactly how much interest you will pay for any given tenor is to use the home loan EMI calculator.