For the middle class, owning a home is a dream. However, even if that dream is realized by purchasing a house, a lifetime is often spent repaying the loan. Most people take out a home loan to buy a house. If you take a loan for 30 years, you end up paying EMIs for a lifetime. Moreover, the interest paid over 30 years often exceeds the original loan amount; in fact, you may end up paying double the borrowed amount. Consequently, people often wonder how to pay off their home loans sooner.
If you take a loan of ₹1 crore for 30 years at a minimum interest rate of 7.5%, your monthly EMI comes to ₹69,921. In this scenario, you pay over ₹1.51 crore in interest alone, bringing the total payment to ₹2.51 crore. Therefore, it is important to understand how to pay off a home loan faster.
**Common Confusion Among Borrowers**
Home loan borrowers often face confusion regarding EMIs. For instance, if the EMI is ₹69,921, a borrower might assume that the outstanding loan balance reduces by that exact amount after payment. However, this is not the case. When you pay an EMI of ₹69,921, approximately 90% of it—around ₹62,500—goes towards paying the interest, while the principal amount reduces by only ₹7,421. This pattern continues for the first 15 years, with the majority of the EMI covering interest costs while the principal decreases slowly. Only after 15 years does the principal amount begin to reduce more significantly as the interest component decreases.
**Loan Calculation Example**
**Loan Calculation**
There are two formulas to pay off a home loan faster: the 'Plus One' formula and the '10 Percent' formula. Let us explain them to you.
**What is the 'Plus One' Formula for Home Loans?**
The 'Plus One' formula for home loans relates to the EMI. In this method, you pay your EMI every month throughout the year, but you make one extra EMI payment annually—effectively paying 13 EMIs a year. Since 90% of a standard monthly EMI goes toward paying off the interest, that 13th installment—the extra payment—goes entirely toward reducing the principal amount, as it contains no interest component. If you follow this strategy, your loan will be paid off in 23 years and 7 months.
The 10% EMI Increase Formula
Another strategy to pay off your home loan faster is the "10% EMI increase" method. If you increase your EMI by 10% each year—aligning the increase with your annual salary increments—a loan originally scheduled for 30 years can be paid off in just 11 years and 2 months. For instance, if you are currently paying an EMI of ₹20,000, you would increase it by 10% to ₹22,000 the following year, then increase it by another 10% the year after that, and continue this pattern.
Pay Off Your Home Loan in Less Than 11 Years
If you combine both strategies—paying one extra EMI annually (the "plus-one" method) and increasing your EMI by 10% each year—you can clear your home loan in 10 years and 6 months. In other words, you can pay off the loan in less than 11 years.
The simple key to paying off a home loan is reducing the principal amount. If you focus on lowering the principal, you will be able to settle your loan much faster.
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