I was recently quoted in LiveMint in an articled titled “Why prepayment of home loans is better in early years of tenure than later”.
Here is the link to the online version of the article – Link
The article references to a long twitter thread I wrote (link) about when you should make home loan prepayments. Here are a few of the points from the article itself –
Dev Ashish, founder of Stableinvestor explains that making prepayments is better in the early years of the tenure of a home loan rather than later. Home loan prepayments simply mean you pay a certain portion of your loan amount earlier than the planned repayment period. Generally, a borrower tends to pre-pay their loan amount upon having surplus funds. The benefits of prepayment are that they tend to lower your EMI burdens or shorten the loan tenure or reduce debt and even help in minimising interest rates.
According to the founder of Stable Investor which is a financial planning and investor advisory firm, if you take a home loan, you will realize that the loan principal gets paid off slowly during the initial years. This is exactly why it is better to make prepayments earlier in tenure than later.
In a thread on his Twitter handle, Dev explained that when you opt for long-tenure loans (like home loans), a significant part during the first few years is only about paying interest. This means that interest is ‘front-loaded’.
He further explained with an example. Let’s suppose, you take a ₹50 lakh home loan at an interest rate of 8% for a period of 25 years. The monthly EMI comes to around ₹38,591. While for the entire tenure of 25 years, the total amount you will end up paying a total interest of around ₹65.8 lakh including interest.
Further, explaining the example with a chart, Dev pointed out that the first 5 years (1-5 years) of regular EMI payments (each month without fail), which is 20% of the loan tenure of 25 years, only 7.7% of the loan is paid off. He said, there are a total of five 5-year periods of this 25-year loan (5 years X 25 years). In the next five years (6-10 years), only 19.2% of the total loan amount is repaid. This would be a rise of 11.5% in the loan paid off from the first set of five years to the second.
From the data, it can be understood that, by the end of 15 years (the third set of five years which is 11-15 years), around 36.4% of the loan is paid off — which is a rise of 17.2% from the second set. But there is a massive jump of 25.5% from the third set, as by the end of 20 years (fourth set of five years which is 16-20 years) around 61.9% of the loan is paid off.
Compared to the fourth set of tenures (16-20 years), there is a jump of 38.1% as in the fifth and the last set of tenures (21-25 years) — 100% of the loan amount is paid off. Hence, Dev said, the EARLIER you make the prepayments, the better it is for you in terms of its impact on reducing the total interest paid during the loan tenure.
You can also read an article I wrote about this topic –