How to Save Lakhs on Your Home Loan Interest: A Simple Guide
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- on Jan 21, 2026
How to Save Lakhs on Your Home Loan Interest: A Simple Guide
Buying a home is a dream for every one of us, but the long-term home loan that comes with it can feel like a heavy burden. While we focus on the monthly EMI, we often ignore the massive amount of interest we pay over 15 or 20 years. In many cases, the interest paid to the bank is almost equal to the original loan amount!
It is amazing to see how much a few small changes can save you. For a loan of ₹30 Lakhs at an 8% interest rate for a 20-year tenure, your total interest alone would be approximately ₹30,23,000. That means you pay back double what you borrowed!
The good news is that prepaying your home loan is one of the smartest financial moves you can make. By paying a bit extra today, you can save a lot tomorrow.
Here is a breakdown of how different prepayment strategies can change your financial future.
| Strategy | New Tenure | Total Interest Paid | Total Interest Saved |
|---|---|---|---|
| No Prepayment | 20 Years | ₹ 30,23,138 | ₹ 0 |
| Pay 1 Extra EMI / Year | ~16.5 Years | ₹ 24,10,000 | ~₹ 6.13 Lakhs |
| 5% Increase in EMI / Year | ~12 Years | ₹ 17,35,000 | ~₹ 12.88 Lakhs |
| One-time ₹ 2 Lakh Prepayment (at start of Year 3) | ~17.5 Years | ₹ 25,45,000 | ~₹ 4.78 Lakhs |
1. How Prepayment Works
When you pay your regular EMI, a large portion goes toward the interest, and only a small part reduces your actual loan amount (the principal). However, when you make a “prepayment,” the entire prepayment amount goes directly toward reducing your principal. This reduces the base on which future interest is calculated, leading to a much shorter loan tenure and massive savings, say ₹6 Lakhs or 3.5 years.
2. Start with a Small Yearly Top-up
You don’t need a huge lump sum to start. A popular strategy is the “One Extra EMI” rule. If you pay just one additional EMI every year, you can reduce a 20-year loan by approximately 3 to 4 years. Many people use their yearly work bonus or tax refunds to make this extra payment.
3. Increase Your EMI with Your Salary Hike
As your income grows every year, your loan repayment should too. Even a small 5% increase in your monthly EMI every year, you could finish a 20-year loan in just 12 years. This method is “painless” because you are simply using your salary increment to clear your debt faster without changing your current lifestyle.
4. Use Windfall Gains Wisely
Whenever you receive a large sum of money from bonus, or an insurance maturity, or a gift, or the sale of an old asset, consider putting a portion of it into your home loan. Even a one-time payment of ₹ 1 Lakh early in your loan journey can save you multiple lakhs in interest over the remaining years.
5. The Importance of Timing
The best time to prepay is during the first half of your loan tenure. This is because interest is highest in the initial years. If you prepay when you only have 2 or 3 years left, the interest savings will be much lower. Always check with your bank if there are any processing fees, though most banks do not charge a penalty for prepaying floating-rate home loans.