# How Do Loan Tenure and Interest Rate Affect the Pace of Home Loan Repayment?

Every home loan borrower wants to close the home loan quickly. After all, you truly own your house once you have repaid the entire home loan.

## How Does the Home Loan Amount Go Down?

We know how loan mathematics works. Most home loans are reducing balance loans.

With reducing balance loans, a portion of EMI goes towards interest payment and the rest goes towards principal repayment.

Now, the interest component depends on the interest rate and the outstanding principal. And since the outstanding principal is higher during the initial years, the interest component of the EMI is also high. Since the interest component is high, the principal repayment component is low. That’s why the principal outstanding goes down very slowly during the initial years.

Gradually, as the principal outstanding goes down, the interest payment component of EMI comes down and principal repayment becomes faster.

Here is a breakdown of the amortization schedule of a Rs 50 lacs loan at 8% for 20 years.

At the end of the 1st year, even though you have paid 5% of EMIs, your principal outstanding will go down by 2.1%.

 Month Loan outstanding at the start of the Month EMI Interest Payment Principal Repaid Loan O/S at the end of the month % Principal Repaid 1 5,000,000 41,822 33,333 8,489 4,991,511 0.170% 2 4,991,511 41,822 33,277 8,545 4,982,966 0.171% 3 4,982,966 41,822 33,220 8,602 4,974,364 0.172% 4 4,974,364 41,822 33,162 8,660 4,965,704 0.173% 5 4,965,704 41,822 33,105 8,717 4,956,987 0.174% 6 4,956,987 41,822 33,047 8,775 4,948,212 0.176% 7 4,948,212 41,822 32,988 8,834 4,939,378 0.177% 8 4,939,378 41,822 32,929 8,893 4,930,485 0.178% 9 4,930,485 41,822 32,870 8,952 4,921,533 0.179% 10 4,921,533 41,822 32,810 9,012 4,912,521 0.180% 11 4,912,521 41,822 32,750 9,072 4,903,449 0.181% 12 4,903,449 41,822 32,690 9,132 4,894,317 0.183%

For a detailed understanding of how loan mathematics works, refer to this post.

### The Longer the Tenure, the Gradual the Decline in Outstanding Principal

As Expected. When the tenure is longer, the EMI is lower.

For instance, The EMI for a Rs 50 lacs loan at 8% will be as follows for these tenures.

• 20 years: Rs 41,822
• 25 years: Rs 38,590

The EMI is lower for longer tenure, but the interest cost is the same since the starting principal and interest rate are the same. Thus, if the tenure is longer, an even bigger portion of the EMI goes towards interest payment. And less towards principal payment. Hence, the principal goes down slowly.

For instance, for a 20-year loan, you repay Rs 8,489 of the principal amount in the first month.

For a 25-year loan, you repay only Rs 5,257.

Here is the amortization schedule for Rs 50 lacs loan at 8% for 20 years.

 Year Loan outstanding at the start of the Year EMI Interest Payment during the year Principal Repaid during the year O/S principal at the end of the month % Principal Repaid 1 5,000,000 41,822 396,181 105,683 4,894,317 2.1% 2 4,894,317 41,822 387,409 114,455 4,779,862 2.3% 3 4,779,862 41,822 377,909 123,955 4,655,907 2.5% 4 4,655,907 41,822 367,621 134,243 4,521,664 2.7% 5 4,521,664 41,822 356,479 145,385 4,376,279 2.9% 6 4,376,279 41,822 344,412 157,452 4,218,827 3.1% 7 4,218,827 41,822 331,344 170,520 4,048,307 3.4% 8 4,048,307 41,822 317,191 184,673 3,863,634 3.7% 9 3,863,634 41,822 301,863 200,001 3,663,633 4.0% 10 3,663,633 41,822 285,263 216,601 3,447,031 4.3% 11 3,447,031 41,822 267,285 234,579 3,212,453 4.7% 12 3,212,453 41,822 247,815 254,049 2,958,404 5.1% 13 2,958,404 41,822 226,729 275,135 2,683,269 5.5% 14 2,683,269 41,822 203,893 297,971 2,385,298 6.0% 15 2,385,298 41,822 179,162 322,702 2,062,596 6.5% 16 2,062,596 41,822 152,378 349,486 1,713,109 7.0% 17 1,713,109 41,822 123,370 378,494 1,334,616 7.6% 18 1,334,616 41,822 91,956 409,908 924,707 8.2% 19 924,707 41,822 57,933 443,931 480,777 8.9% 20 480,777 41,822 21,087 480,777 0 9.6%

Amortization schedule for Rs 50 lacs loan at 8% for 25 years

 Year Loan outstanding at the start of the Year EMI Interest Payment during the year Principal Repaid during the year O/S principal at the end of the month % Principal Repaid 1 5,000,000 38,591 397,635 65,455 4,934,545 1.3% 2 4,934,545 38,591 392,202 70,888 4,863,657 1.4% 3 4,863,657 38,591 386,318 76,772 4,786,885 1.5% 4 4,786,885 38,591 379,946 83,144 4,703,742 1.7% 5 4,703,742 38,591 373,045 90,045 4,613,697 1.8% 6 4,613,697 38,591 365,572 97,518 4,516,179 2.0% 7 4,516,179 38,591 357,478 105,612 4,410,567 2.1% 8 4,410,567 38,591 348,712 114,378 4,296,189 2.3% 9 4,296,189 38,591 339,219 123,871 4,172,318 2.5% 10 4,172,318 38,591 328,937 134,152 4,038,165 2.7% 11 4,038,165 38,591 317,803 145,287 3,892,878 2.9% 12 3,892,878 38,591 305,744 157,346 3,735,533 3.1% 13 3,735,533 38,591 292,684 170,405 3,565,127 3.4% 14 3,565,127 38,591 278,541 184,549 3,380,578 3.7% 15 3,380,578 38,591 263,223 199,866 3,180,712 4.0% 16 3,180,712 38,591 246,634 216,455 2,964,257 4.3% 17 2,964,257 38,591 228,669 234,421 2,729,836 4.7% 18 2,729,836 38,591 209,212 253,878 2,475,958 5.1% 19 2,475,958 38,591 188,140 274,949 2,201,008 5.5% 20 2,201,008 38,591 165,320 297,770 1,903,238 6.0% 21 1,903,238 38,591 140,605 322,485 1,580,753 6.4% 22 1,580,753 38,591 113,839 349,251 1,231,502 7.0% 23 1,231,502 38,591 84,851 378,239 853,264 7.6% 24 853,264 38,591 53,457 409,632 443,632 8.2% 25 443,632 38,591 19,458 443,632 – 8.9%

A quick comparison.

 Percentage loan amount repaid. Rs 50 lacs at 8% p.a. Years Loan Tenure 20 years Loan Tenure25 years 1-5 12.5% 7.7% 6-10 18.6% 11.5% 11-15 27.7% 17.1% 15-20 41.3% 25.5% 20-25 – 38.1% Total 100.0% 100.0%

### The Higher the Interest Rate, the Gradual the Decline in Outstanding Principal

Again, as expected. Everything being the same, if the interest rate is higher, a bigger portion of EMI will go towards the interest payment and less towards principal repayment.

Rs 50 lacs loan for 20 years.

At 8% p.a.: EMI is Rs 41,822. In the first month, principal repayment = Rs 8,489

At 9% p.a.: EMI is Rs. 44,986. In the first month, principal repayment = Rs 7,486

 Percentage loan amount repaid.Rs 50 lacs loan for 20 years Years At 8% p.a. At 9% p.a. At 10%p.a. 1-5 12.5% 11.3% 10.2% 6-10 18.6% 17.7% 16.8% 11-15 27.7% 27.7% 27.6% 15-20 41.3% 43.3% 45.4% Total 100.0% 100.0% 100%

The above analysis is with the assumption that the interest rate won’t change during the tenure. As the interest rate goes up, the principal repayment would slow down.

## Expedite Loan Closure through Prepayments

Your home loan is closed when the principal outstanding goes down to zero. You can let home loan run down at its own sweet pace. Or you can aggressively reduce principal by making regular prepayments. The math behind prepayments is very clear.

Firstly, the outstanding principal goes down by the prepayment amount. Secondly, lower loan amount outstanding = Lower interest component of EMI = Higher principal component of EMI. This sets off a domino effect.

For instance, in a Rs 50 lacs loan at 8% p.a. for 20 years, the loan outstanding at the end of the 1st year will be Rs 48.94 lacs. 228 months still left in the loan. If you prepay the loan by Rs 5 lacs at the end of 1st year, the loan gets repaid in the next 182 months (a total of 194 months). You save a total of 46 EMIs.

Additionally, given the way the loan mathematics works, the sooner you prepay, the more you will save.

For instance, if you were to prepay loan by Rs 5 lac at the end of 5th year (instead of 1st year), the loan will finish in a total of 205 months. You save 35 EMIs.

## The Most Basic Rule of All

An 8% loan (assuming no change in interest rate) remains an 8% loan irrespective of how or if you make any prepayments. The monthly payment (EMI) is fixed. Interest component depends on the interest rate (let’s say 8%) and the principal outstanding.

You make a prepayment. Principal outstanding goes down. Next month, the interest component will be lower because the principal outstanding has gone down. But you still pay 8% on the reduced principal. Prepayments do not change the overall cost of your loan.

By making prepayments, you only reduce the nominal (absolute) interest outgo. This might give you the impression that you have saved on interest. Yes, you have but you could have invested the prepayment amount and earned returns. If you earned more than 8% on your investment, you would have been better off than prepaying. Classic prepay or invest question. However, let’s not go there.

The intent is not to suggest whether home loan prepayment is a good or bad choice. This is just to dispel the notion that you save on interest costs. You save only the nominal interest costs. The percentage cost of loan does not change because of prepayment.

Home Loan prepayment is clearly a simpler choice. Whether investing (instead of prepaying) would have been a better choice or not? This can only be known in hindsight.

## Product Innovation

Home loans do not have to be reducing balance loans. There is no regulatory requirement. There are loan products such as Axis Quick Pay where you pay equal amount of principal with each monthly installment. With such loans, the loan outstanding goes down at a brisker pace in the initial years. At the same time, the monthly payments are also high in the initial period.