How Does a Longer Home Loan Tenure Reduce the Pace of Loan Repayment?

That’s how it should be, right? Longer home loan tenure means you want a longer period to repay the home loan. And that can happen only if you repay the loan slowly.

Still, when I wrote about a 40-year home loan product a few weeks back and discussed how you would have paid only ~15% of the loan even after 20 years, a reader shot back an email indicating surprise at such slow pace of repayment. I think the disbelief was that despite paying EMIs for 20 years (half the loan tenure of 40 years), only 15% of the loan would have been repaid.

While I understand the surprise, this is how loan mathematics works. The biggest benefit of 40-year loan is a low EMI (and thus higher affordability). But the low EMI is the culprit here. That’s what slows down the pace of repayment.

In this post, let’s understand this with the help of an illustration. Before we move ahead, it would be helpful to refresh the math behind reducing balance EMIs.

Let’s consider 2 home loans of Rs 50 lacs. First has a tenure of 20 years and the second has a tenure of 40 years. Interest rate is the same at 9% p.a. in both the loans.

• EMI for 20-year loan = Rs 44,986
• EMI for 40-year loan= Rs 38,568

Your home loan EMI has 2 components. A portion of EMI goes towards interest payment. And the remaining amount (EMI-Interest payment) goes towards the principal repayment.

Let’s look at how the loan gets repaid in the first year for the two loan tenures.

Principal Amount					50 lacs
Interest Rate					9%
Loan Tenure (Years)	20				40
EMI	44,986				38,568
Month	Interest Payment	Principal Repayment	O/S Principal at the end of the month		Interest Payment	Principal Repayment	O/S Principal at the end of the month
1	37,500	7,486	4,992,514		37,500	1,068	4,998,932
2	37,444	7,542	4,984,971		37,492	1,076	4,997,856
3	37,387	7,599	4,977,372		37,484	1,084	4,996,772
4	37,330	7,656	4,969,716		37,476	1,092	4,995,679
5	37,273	7,713	4,962,003		37,468	1,100	4,994,579
6	37,215	7,771	4,954,232		37,459	1,109	4,993,470
7	37,157	7,830	4,946,402		37,451	1,117	4,992,353
8	37,098	7,888	4,938,514		37,443	1,125	4,991,228
9	37,039	7,947	4,930,566		37,434	1,134	4,990,094
10	36,979	8,007	4,922,559		37,426	1,142	4,988,951
11	36,919	8,067	4,914,492		37,417	1,151	4,987,801
12	36,859	8,128	4,906,364		37,409	1,160	4,986,641

As you can see, at the end of the first year, you have repaid Rs ~94,000 of principal. Under the 40-year loan, the loan repayment is only ~14,000.

Why did this happen? Because the EMI of the 40-year loan was lower.

Focus on the 1st row (1st month). The interest payment is the same in both the cases. Rs 37,500. However, since the 20-year loan has an EMI of Rs 44,981, you repaid Rs 7,486 of principal. In the 40-year loan, the interest eats up most of the EMI. Only Rs 1,068 goes towards principal repayment.

And this cumulative difference goes up as the time passes. At the end of the 20th year, you would have repaid the entire principal in 20-year loan. But only ~15% principal in the 40-year loan.

Principal Amount					50 lacs
Interest Rate					9%
Loan Tenure	20 years				40 years
EMI	44,986				38,568
Year	% of Total EMIs paid	% Principal Repaid	% EMI payments that have gone towards principal repayment		% of Total EMIs paid	% Principal Repaid	% EMI payments that have gone towards principal repayment
1	5%	1.9%	17.3%		2.5%	0.3%	2.9%
2	10%	3.9%	18.2%		5.0%	0.6%	3.0%
3	15%	6.2%	19.0%		7.5%	0.9%	3.2%
4	20%	8.6%	19.9%		10.0%	1.2%	3.3%
5	25%	11.3%	20.9%		12.5%	1.6%	3.5%
6	30%	14.2%	22.0%		15.0%	2.0%	3.7%
7	35%	17.4%	23.1%		17.5%	2.5%	3.8%
8	40%	20.9%	24.2%		20.0%	3.0%	4.0%
9	45%	24.8%	25.5%		22.5%	3.5%	4.2%
10	50%	29.0%	26.8%		25.0%	4.1%	4.5%
11	55%	33.6%	28.3%		27.5%	4.8%	4.7%
12	60%	38.6%	29.8%		30.0%	5.5%	5.0%
13	65%	44.1%	31.4%		32.5%	6.3%	5.2%
14	70%	50.1%	33.1%		35.0%	7.1%	5.5%
15	75%	56.7%	35.0%		37.5%	8.1%	5.8%
16	80%	63.8%	37.0%		40.0%	9.1%	6.2%
17	85%	71.7%	39.1%		42.5%	10.2%	6.5%
18	90%	80.3%	41.3%		45.0%	11.5%	6.9%
19	95%	89.7%	43.7%		47.5%	12.8%	7.3%
20	100%	100.0%	46.3%		50.0%	14.3%	7.7%
21	–	–			52.5%	15.9%	8.2%
22	–	–			55.0%	17.6%	8.7%
23	–	–			57.5%	19.5%	9.2%
24	–	–			60.0%	21.7%	9.7%
25	–	–			62.5%	23.9%	10.3%
26	–	–			65.0%	26.5%	11.0%
27	–	–			67.5%	29.2%	11.7%
28	–	–			70.0%	32.2%	12.4%
29	–	–			72.5%	35.5%	13.2%
30	–	–			75.0%	39.1%	14.1%
31	–	–			77.5%	43.0%	15.0%
32	–	–			80.0%	47.3%	16.0%
33	–	–			82.5%	52.1%	17.0%
34	–	–			85.0%	57.2%	18.2%
35	–	–			87.5%	62.8%	19.4%
36	–	–			90.0%	69.0%	20.7%
37	–	–			92.5%	75.7%	22.1%
38	–	–			95.0%	83.1%	23.6%
39	–	–			97.5%	91.2%	25.3%
40	–	–			100.0%	100.0%	27.0%

Another interesting point: Longer the loan tenure, less of your EMI payments go towards principal repayment. Under the 20-year loan tenure, 46.3% of the total payments go towards principal repayment. On the other hand, only 27% of EMI payments go towards principal repayment under the 40-year loan. The reason is again the same. Lower EMI (for the longer tenure loan) means more money goes towards interest payments.

Here is an infographic to show the pace of principal repayment for various tenures (at an interest rate of 9% p.a.).

If you still have questions about the pace of loan repayment, do let us know in the comments section.