A home loan EMI (Equated Monthly Installment) consists of two parts: the interest and the principal repayment. The bank calculates interest at the beginning of each month based on the remaining principal outstanding. The formula for interest calculation is:
Interest for the month = (Outstanding Principal × Interest Rate) ÷ 12
Once the interest is deducted from the EMI, the remaining amount goes toward repaying the principal. The EMI amount remains fixed throughout the tenure, but the ratio of interest to principal changes over time.
To better understand the calculations and savings, we will use the example of a ₹50 lakh home loan at 8.5% interest for 30 years with an EMI of ₹38,445 throughout this article.
In the first few years of a home loan, a large portion of your EMI goes toward interest rather than principal repayment. Since the principal outstanding is highest at the beginning, the interest component is also high. This means that only a small fraction of your EMI reduces the actual loan amount. As a result, the next month's interest is calculated on a principal that has only slightly decreased.
In our above example, we will have an opening balance of 50 lakh rupees in the first month of the repayment. The bank will receive ₹35,417 in interest from the EMI of ₹38,445. Just ₹3,029 of the remaining sum will be used to repay your loan. The total amount we will have at the end of the month is still ₹49,96,971. Since the principal is barely reduced, the interest in the following months remains high, keeping you in debt longer.
Here are some actual calculations of interest and principal component payable from the EMI. Notice that the interest amount reduces very slowly till 240th EMI, i.e. till 20 years, and in the next 10 years the principal component takes lead.
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The EMI Boost Strategy involves increasing your EMI by 10-20% in the early years of the loan. The interest amount for the month is still determined by the outstanding principal amount at the start of the month, even if you increase your EMI. Therefore, if you raise your EMI, the interest that is due each month remains the same, but the additional EMI amount will be used to pay off the principal outstanding amount.
In our previous example, lets try to increase the EMI by 10%. The EMI will change from ₹35,417 to ₹42,290. For 50 lakh outstanding the interest applicable is still ₹35,417, same as before. But now the amount going as repayment of principal will be ₹42,290 - ₹35,417 = ₹6,873. This makes the opening balance for next month even smaller. Again, in next month we pay more as principal component, and this cycle goes on till end of the tenure. Increasing the EMI allows more of your payment to go toward reducing the principal faster. This in turn lowers the future interest burden and shortens the loan tenure significantly.
The decision to increase the EMI can be taken at any point of time during the tenure of loan. But it is a good idea to think of your emergency funds, extra cash, and capacity to pay more as an extra EMI. People usually increase their EMI after getting a significant increase in income after each 2 to 5 years. To save even more, it would be preferable to keep increasing the EMI several times during the loan term.
If you continue increasing the EMI by 10% after period of few years, you could pay off the loan in 15-18 years instead of 30 years and save lakhs in interest.
As your income grows due to annual appraisals, you can increase your EMI accordingly. Most banks allow borrowers to increase their EMI by submitting a request. Here’s how you can do it:
1. Will increasing EMI attract penalties? Most banks do not charge penalties for increasing EMI, as it benefits both the borrower and the bank by reducing the risk of long-term default.
2. What if I cannot afford to increase EMI later? There’s no obligation to increase EMI every year. Even a one-time increase in EMI can still lead to significant savings.
3. Should I save and prepay instead? While prepayment is another option, increasing EMI ensures consistent principal reduction without requiring lump sum savings.
If you want to pay off your home loan faster and save lakhs in interest, boosting your EMI gradually is a powerful strategy. Since home loan EMIs remain fixed, increasing payments in the early years ensures that more money goes toward the principal rather than interest. This method is easy to implement by requesting annual EMI hikes in line with salary increments. By adopting this approach, you can achieve financial freedom years ahead of schedule while saving a substantial amount in interest costs.
Read other ways to save costs on your home loan - 6 Ways to Reduce Your Home Loan Costs
