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How much time and interest do you save if you pay off your home loan using a step-up EMI?

Posted on 01 May 2024
Author: Sayan Sircar

Tags: House Purchase ; Loans

12 mins read
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This article shows how quickly you can pay off your home loan, and even save a lot of interest, by increasing your EMI steadily year-on-year.

How much time and interest do you save if you pay off your home loan using a step-up EMI?

This article is a part of our detailed article series on the concept of home loans. Ensure you have read the other parts here:

Home loan tax benefits that you get when you buy a property jointly with your spouse

This article tells you why it is a good idea to buy a home jointly as a couple and it is not only the tax benefits you get.

Home Loan Eligibility for Joint Applicants: how to buy a bigger house

This article shows you an easy way to calculate how big a house you can buy based on your family’s combined monthly salary.

Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?

Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.

How paying a small fee to your bank can save you lakhs in home-loan interest?

This article shows how paying a small fee to your bank to reduce your home loan rate can save you lakhs in interest over the life of your loan.

What benefit do you get if you make a one-time prepayment to your home loan?

This article shows you the benefits due to interest saving when you make a part-payment to your home loan. Your loan duration also reduces due to the pre-payment.

How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Should you prepay your home loan at the beginning or at the end of the tenure?

This article helps you decide when to prepay your home loan - at the beginning, middle or end of the total loan period.

How does an overdraft loan like SBI Maxgain work?

This articles describes overdraft home loans like SBI Maxgain and BOB Home Loan Advantage.

What should you do when your home loan interest rates go up?

This post discusses managing when interest rates go up increasing your home loan EMI.

📚 Topics covered:

How does a step-up EMI work?
How does a home loan work?
How much time do you save with a step-up EMI?
- Step-up EMI % vs. home loan interest rate
- Step-up EMI % vs. home loan duration
How much interest do you save with a step-up EMI?
- Step-up EMI % vs. home loan interest rate
- Step-up EMI % vs. home loan duration
How to pay off your home loan automatically via step-up EMI?

How does a step-up EMI work?

A step-up EMI, just like the step-up-SIP that amplifies your wealth, is a way to quickly pay off your home loan so that you save both interest and time. If your home loan is paid off quickly, thanks to salary and income increases, it will likely increase the value of your retirement portfolio: How much lower portfolio value do you end up with if you do not invest for a few years in between?

In the example below, we will show the monthly EMIs of a normal EMI for a ₹1 crore house (₹75 lakhs loan at 9% for 15 years, ₹25 lakhs down-payment) vs the same loan being paid off with a 10% step-up EMI like this:

Year	Normal EMI	10% Step-up EMI
1	₹77,537	₹77,537
2	₹77,537	₹85,290
3	₹77,537	₹93,820
4	₹77,537	₹1,03,201
5	₹77,537	₹1,13,522
6	and	so on

Before we get into the details of how the Step-up EMI is beneficial, we will recap how a home loan works.

How does a home loan work?

Mortgage payment vs home equity

The bank gives a home loan to own the property while you use it until you pay back the loan via EMIs. An Equated Monthly Instalment plan (EMI) is a standard way to pay off a loan by making a fixed payment monthly that has both interest and principal in the same amount.

EMI = Principal + Interest

In each EMI, the split of the interest and principal changes since the interest is based on the outstanding loan balance at that point and the rest of the EMI is principal. As the chart shows, the interest part drops off with time, and the rest is the principal. The actual numbers in the chart relate to a ₹50 lakhs home loan taken at 8% for 25 years. The EMI is ₹38,591. The down payment amount is ₹12.5 lakhs.

You can test the numbers using this calculator:

As you pay back the loan, your ownership share in the house will increase in the same way. At the point of taking the loan, you own 20% of the house (12.5 out of 62.5 of which 50 is the loan). The bank owns 80%. As the loan is repaid, you own more and more of the house as the principal is paid off. This is the concept of building equity in an asset. Equity is the part of the asset you own after subtracting the part that the bank owns.

Home equity value = Current home value - Outstanding loan balance

Once you build equity in your home, that has additional benefits:

you can take a top-up loan in case you need money for some other purpose like home improvement, or any other reason
the more you will get to keep if you sell the house

We break down the home loan rate into its major components to see where the fluctuations come from.

Repo linked Home loan rate = Repo Rate + Spread + Premium

Repo rate: This rate is decided by RBI. Home loan rates will move up and down as soon as RBI revises the Repo rate

The latest repo rate is 6.5%. This rate was last reviewed by RBI on 08 Feb 2024.

Spread: This is an additional rate on top of the repo rate that essentially captures the profit the bank can make off this loan relative to the deposits it offers to customers. This rate is generally revised every three years but will vary from bank to bank.

Premium: an extra value for some specific customers. E.g SBI adds another 15bps for non-salaried customers or will depend on the CIBIL score of the borrower. This value is also revised periodically like every three years.

Continuing the ₹75 lakhs 15-year home loan at 9% example, the normal EMI looks like this:

Home loan repayment schedule with fixed EMI

In contrast, the 10% step-up EMI pays off the loan in 43% less time (and saves 36% of the interest).

Home loan repayment schedule with Step-up-EMI with 10 percent yearly step-up

We will now quantify the savings involved via a step-up EMI for your home loan.

To understand how to choose a suitable step-up EMI amount:

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How much time do you save with a step-up EMI?

Step-up EMI % vs. home loan interest rate

Time Saved With Step Up Home Loan EMI Vs Home Loan Rate

In the table above, for a 15-year loan:

At 9% loan rate, if you step up your EMI by 10% a year, you save 43.42% of the time
At 10% loan rate, if you step up your EMI by 5% a year, you save 31.39% of the time

Step-up EMI % vs. home loan duration

Time Saved With Step Up Home Loan EMI Vs Home Loan Duration

In the table above, at a 9% loan interest rate:

For a 10 year loan, if you step-up your EMI by 10% a year, you save 31.90% of the time
For a 20 year loan, if you step-up your EMI by 5% a year, you save 39.23% of the time

How much interest do you save with a step-up EMI?

Step-up EMI % vs. home loan interest rate

Interest Saved With Step Up Home Loan EMI Vs Home Loan Rate

In the table above, for a 15 year loan:

At 9% loan rate, if you step-up your EMI by 10% a year, you save 36.30% interest
At 10% loan rate, if you step-up your EMI by 5% a year, you save 26.34% interest

Step-up EMI % vs. home loan duration

Interest Saved With Step Up Home Loan EMI Vs Home Loan Duration

In the table above, at a 9% loan interest rate:

For a 10 year loan, if you step-up your EMI by 10% a year, you save 23.70% interest
For a 20 year loan, if you step-up your EMI by 5% a year, you save 35.00% interest

How to pay off your home loan automatically via step-up EMI?

Year	Normal EMI	10% Step-up EMI	Extra EMI
1	₹77,537	₹77,537	₹0
2	₹77,537	₹85,290	₹7,754
3	₹77,537	₹93,820	₹16,283
4	₹77,537	₹1,03,201	₹25,665
5	₹77,537	₹1,13,522	₹35,985
6	and	so	on

Your loan-issuer bank will create an Electronic Clearing System (ECS) instruction to automatically debit your loan EMI. You should talk to your bank about getting the loan-account number and IFSC code of the servicing branch. Then you can map the account as a beneficiary in Net-banking and setup a NEFT standing instruction to automatically pay the step-up amount i.e. the extra EMI soon after you get salary every month. Some banks even offer UPI payments to the loan account. Once a year, login into Net-banking and increase the standing instruction amount. If the loan EMI changes due to repo rate change, adjust the step-up amount as well.

As per RBI circulars DBOD.No.Dir.BC.107/13.03.00/2011-12 dated June 5, 2012, and the subsequent circular DBOD.Dir.BC.No.110/13.03.00/2013-14 dated May 7, 2014, banks cannot charge pre-payment penalty any more on home loans.

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