One of the biggest personal financial decisions is buying a home. Usually for a person from the salaried class, it is taking a home loan from a bank and buying a home.
When you take a home loan from a bank, the key parameters that one looks at are interest rate, fixed rate or floating rate of interest, amount that you have to contributed towards the home (owner’s equity) and the home loan tenure (e.g. 10 year, 15 year, 20 year home loan) . These factors determine the amount of Equated Monthly Installment (EMI) that you pay. EMIs are a combination of principal repayment and interest repayment. Principal is the amount you borrow from the bank and interest is what you pay for borrowing.
Today, I will explain impact of home loan tenure on your total cost of acquiring a home. This article will take you through the details in a easy way. At the end of the article I have provided a link for free download of an Excel. You can use this Excel to understand how home loans and EMIs work. I strongly urge you to download this Excel and share it with others. Seeing the EMI and home loan tenure calculations yourself is the best way to learn about home loans.
I have created illustrative charts which will show you the impact of loan tenure on your total payments to the bank.
20 year home loan tenure
15 year home loan tenure
10 year home loan tenure
Learning no. 1
What many people are unaware of is that in the first few years interest payments on the outstanding principal are the biggest component of the EMI payments to the bank. Initially only a small portion of EMI is principal repayment. As months pass, principal outstanding decreases with monthly principal repayments. Since there is lesser loan outstanding, gradually the interest component of EMI reduces and automatically principal repayments go up.
In a nutshell, even after 4-5 years of taking a home loan you do not pay back substantial part of principal. Most of it is still outstanding and is your liability.
Learning no. 2
You pay the complete principal amount over life of the loan. There is no escaping this fact. But you progressively make larger amounts of total interest payments over life of the loan as the loan tenure keeps increasing.
How does the loan tenure affect the total interest payment?
As an example, for a home loan of 20 year tenure, 25% owner’s contribution to cost of house, interest rate fixed at 11%, the interest payments over 20 years are around 111% of the cost of the house. Say the house costs Rs. 20 lakh when you purchase it. At the end of 20 years you will have paid around Rs. 22 lakh as interest to the bank. This is separate from the principal of Rs. 15 lakh (75% loan on cost of Rs. 20 lakh). How is that for an eye-opener? Read it again. I can assure you its true.
When loan tenure reduces total interest cost reduces too. Consider a loan with all else similar to the loan in the example above except that tenure is 10 years instead of 20 years. For this loan you pay 49% of the cost of the house to the bank as interest payments over 10 years.
The tenure is half that of the earlier loan. Interest payments are lesser than half the earlier amount.
Click here for a free Excel download to understand the impact of home loan tenure on interest cost.
Feel free to share this article with your friends so that like you others can benefit too!
Prabhakar says
I want to know the impact of 5 year short home loan tenure for 5-6 lakhs
regrds
Kunal Pawaskar says
Hi Prabhakar,
I will need to prepare it. It will take some time. I will update and share it in a couple of days.
ashu says
its an eye opener man… amazing 🙂
Thanks
Kunal Pawaskar says
You are welcome Ashu. Share it with others if you found it useful. Help others too 🙂
Amit says
Hi ,
Suppose i have taken loan of 25 lakh and for 15yrs from sbi in max gain ,, but finally I have jst took 20 lac and oi have made the payment of emi like 10 year of tenure. So finally how much intrest I have to pay to bank , according to 10 yr tenure or 15 yr tenure.
Kunal Pawaskar says
Hi Amit,
I have not sure I have understood your question. Please can you clarify. What was the original tenure? How many years have you paid down? Has there been any change in the loan terms?
Parag says
Hi, I have taken loan of around 25 lakhs from Axis bank 4 years back. I have now only 8 Lakhs outstanding to be paid as I did pre-payment. Let me know if it is a good option to pay further 4 lakhs and keep only 4 lakhs. would I get any tax relief. Can you help me to understand it in more details.
Regards,
Parag
Kunal Pawaskar says
Hi Parag,
The general principle is that you pay off your loans if you have the surplus cash rather than keeping it in investments which earn at a rate less than that of the loan.
To the extent that you prepay, your tax relief that you were able to claim earlier will come down.
Bala says
Hi Kunal
Thanks for your info. Indeed it is valuable. I need few clarification on Home loan. I have taken loan from LIC
Amount : 40L
tenure: 25 years
ROI : 10.95%(fixed for 10 years)
I want to know if I go for partial payment which is best option; reducing tenure or reducing EMI amount.
Please provide me your valuable info considering above information.
Thanks in advance
Bala
Kunal Pawaskar says
Hi Bala,
Reducing tenure should work better. Think of it like the same logic. You have some loan still outstanding. The longer it is outstanding the more interest you will end up paying in total.
Regards,
Kunal
Sangeetha says
Hi Kunal,
Nice post. I knew that we pay interest amount to the banks as equal or greater than the actual principal and that worries me whenever I think of my home loan.
I took a home loan from AXIS 5 years before for 23 Lakhs – 20 Yrs tenure. Recently I transferred outstanding loan to SBI – 20 Lakhs – 10 Yrs for a lower interest rate (floating).
On paying monthly EMI of 23K for 5 years, only 3L had gone for the principal and rest 12L had gone for interest. 🙁 Now my questions
1) Was my decision right that I transferred the loan to SBI after having paid huge interests for 5 years?
But SBI has definitely lesser interest rate than AXIS and I have reduced the tenure too.
2) I have 0 savings now and I have opened a PPF account to start saving. I’m expecting some cash to come around 1Lakh. Do I pay that 1Lakh as pre-payment for my home loan or do I put in PPF for my savings?
Please advise.
Ankit Jain says
Dear Sir,
I have taken top up loan is 1,90,000/- dated 09-6-2007 From ICICI Bank .Present Interest rate – 16.75%.
EMI Per Month is 2633. Till date i am paying but it is not closing. If I make whole payment to icici bank.
they will take whole interest of tenure period time. how can i cop up with it.what will be pre – payment charges. it very costly. kindly suggest. how can make payment to icici bank come out with more paying interest.
awaiting for your positive reply.
Regards
Ankit Jain
Mo.9601088662
e-mail – Ankitjain.banswara@gmail.com
Kunal Pawaskar says
I am not sure of the type of loan you have taken. Is it a personal loan?
It is a high interest rate that you are paying. You are better off paying off the loan with any unpaid interest (that will continue to add to the basic loan amount and keep growing) and close the loan if you have surplus money. Else, make an effort to save more every month and repay this. It looks like a debt trap otherwise.
Hope you get out of the loan problem, Ankit!
Prateek says
This is an eye opener!! We wanted to go for a home loan, but my main concern was how much i’d end up paying at the end of 15 years tenure. The spreadsheet you have prepared is brilliant and i’m sure i do not want to proceed with a big home loan amount. Rather I would wait for few years for buying property and have lesser liability as a loan.
Thanks much!
Kunal Pawaskar says
Thanks Prateek.
In a scenario where prices are rising the total cost paid might still seem reasonable. But I won’t go out on a limb and predict rising / falling real estate prices. All I can say it is better to be aware of what the costs are.
Ganesh says
Hi Kunal
I need a clarification on the pre payment of my loan
Amount : 22L
tenure: 15 years
ROI : 10.75%(fixed for 3 years)
I want to know if I go for pre payment which is best option; reducing tenure or reducing EMI amount.
considering the fact that i will be able to pre pay my loan with in 6 years of my loan tenure.
Please provide me your valuable info considering above information.
Thanks in advance
Ganesh
Biju says
So do you advice not to by a home from bank loan.. instead we can stay in rented house and can change wehn we needed.
Ramesh Kumar Sahoo says
i need a personal loan as long term of tenure 12-15 years. Kindly suggest. i a salaried employee.
Hemanth says
personal loan is very expensive that ranges from 13-15 %
try no to take one.in worst case, take one for less tenure. for 15 years, you will fed up in paying the interest
Naveen says
Hello Kunal Pawaskar,
I have taken a loan of Rs 25L with LIC HOUSING under 5 years fixed plan @ 9.25 on Oct 2010.
I have not paid any principal repayment yet and now i wanted to make some pre payment against to the principal.
Would you please help me how does it impact my EMI’s if i go to reduce the tenure rather than EMI’s. It would be very helpful to see how much i can prepay according to your statement to reduce the tenure
sreejith says
Dear Sir
I have a federal bank loan of 20lakh but i used only 15lakh, whether the bank going to charge interest for 20lakh or 15lakh.
anjana says
hi,
My hubby took homeloan of 40 lac for 20 years.But we r planning to finish our loan within 10 years…But can you please guide us… How we can save our money and repay to bank..So it can finish with in 10 years
Sagar says
Hi Sir,
I have taken loan of 40L with tenure of 30 yrs, now i would like to change the tenure to 20 yrs, when consulted the Bank the say they cant change the tenure once loan is approved. Is it possible to change the tenure within the same bank? or shall i transfer the loan to other banks.
Thanks,
Sagar
net userou says
thanks buddy…you are amazing. You helped me to save my money.
varsha says
hi,i took the loan from icici bank with the interest rate 10.50% now the interest reduced from10.50 to 10.15so how i could take the benefit of lower interest rate.
Ravin Kumar says
Buying a home is now dream come true for all of us as the Reserve Bank of India has cut repo rate by 25 basis points bringing the policy repo rate to 7.5% from 7.75%.But still we use to have many confusions regarding loan tenure, interest rate and so on. The above article is very good in this respect. You can also refer to a blog that I had read a few days back. Please follow the link:
http://www.propertyclubindia.com/t/ideal-tenure-for-home-loan-10-or-20-or-30-years/960
Upendrakumar says
Am taking home loan from a bank. Amount of seventy lakes. bank is giving only 15 years tenure. Later can I increase my tenure to 20 years .? Without changing it into other bank. Please guide me
ram says
Hi Sir,
First of all thank you for educating in this perspective!!!
My doubt is below cold you please clarify.
Recently I have taken home loan from sbi for 30 lakhs. I asked that loan manager that please keep 15 years as tenure but that manager said that keep 20 years as tenure but pay amount every month as the tenure is 15 years.
Could you please clarify in both cases paying interest to bank is same. My actual tenure is 20 years but I am paying amount as per 15 years tenure more than than calculated emi.
Thanks,
Ram
Lakshmikamesh D says
Hi Sir,
We have a LIC home loan of Rs. 27.8 lacs for 20 years. outstanding. Would like to make part payment to the loan around 4.0 lacs. We want to reduce the tenure by doing so. Can you tell us to how much tenure our loan will come to from 20 years?
kumar says
Dear sir
I want to take home loan around 15 lakhs, tenure 20 years, if I pay the loan of 20 years period in 5 years, do I need to pay the interest for only 5years or do I need to pay the interest for the whole 20 years?
Ranbeer Bhandari says
Hi,
I want to take 10lakhs hoam loan. pls suggest for tenure what will be beneficial for me 10 or 15or 20 years.