My journey of prepaying home loan - 2020-2023

[pawello]

In Feb 2019, I took a home loan of 30 lakhs at an interest rate of 8.95% for a period of 25 years (300 months) from HDFC.

This meant I would end up paying a whopping 44 lakhs as interest on the 30 lakh loan. That's 74 lakhs, a staggering amount that a lot of borrowers do not take into account even while applying for the loan. The meagre tax break on home loan doesn't even begin to compensate this hefty interest outgo, despite annualized.

Anyway, I decided to prepay and fast.

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The initial EMI was roughly 25,000, which is also the base rate (meaning I can increase the EMI but not reduce it below this figure). I had been paying only the EMI till Nov 2020, when I researched and found out that HDFC's running rate at that time was a shallow 6.95%.

Criminally, HDFC had only lowered my rate to 8.30%. It is only after I requested that they actioned the running rate on my account. I paid a one-time fee of 2.950 for the rate change.

In Nov 2020, before the rate was slashed, here's how the loan figures looked like:

• Principal outstanding: 29.2 lakhs
• Total EMI amount paid: 5.5 lakhs
  • Total interest component: 4.7 lakhs
  • Total principal component: 80,000

Just take a moment to go over these figures to understand that even after paying ~22 EMIs of 25,000 each, the principal outstanding had lowered by a meagre 80,000. That's less than 4,000 per EMI towards principal. This is the evil point of any borrowing.

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Thanks to my own research, I began prepaying and continuously applying to reduce the interest rate. This is what transpired from Nov 2020 till the end of 2022:

• Total prepaid amount: 8 lakhs (including the PMAY subsidy of roughly 2.7 lakhs)
• Rate was back to 8.50% now
• Total rate reduction fee paid to HDFC: 4,500
• Principal outstanding: 16 lakhs
• Total EMI amount paid: 16.8 lakhs (including prepayments)
  • Total interest component: 3.5 lakhs
  • Total principal component: 13.2 lakhs
• New adjusted EMI: 44,000

Compare this with the above figures and you'll realize that prepayments (which I always insisted to the lender as being adjusted against the principal) had reduced my outstanding drastically. From 29.2 lakhs to 16 lakhs in a matter of 2 years. Here, the entire 8 lakhs prepaid went against the principal. Not to mention the rate reduction helped a larger outgo from the EMI towards the principal.

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Now for the 2023 part, the main point of this post. This year I did not make many prepayments, but I lowered my interest rate 4 times. This helped me stay within my comfort borrowing area because even though NHB (RBI's equivalent for HDFC before the merger) began raising the rates like it was the end of the world, my loan account stayed safe.

Here's what's happened between Jan-Dec 2023:

• Total prepaid amount: 1 lakh
• Rate reduced from 8.5% to 8.35% (across 4 times; partly possible due to 750+ CIBIL)
• Total rate reduction fee paid to HDFC: 2,360
• Total EMI amount paid: 5.9 lakhs
  • Total interest component: 1.1 lakhs
  • Total principal component: 4.7 lakhs
• Principal outstanding: 11 lakhs
• New adjusted EMI: 38,500 (because after you have reduced a rate a specific number of times with HDFC, you cannot reduce your term. Instead, you must reduce your EMI)

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This whole exercise was to show how tracing your loan book using an amortization spreadsheet (see below) is critical to help you optimize your borrowing. So many of us take a loan and worry about paying timely EMIs. Even when we have surplus money, it's rarely earmarked towards loan prepayment. I'm not even getting into the prepayment vs equity investing debate because if you take a returns-based calculation, on theory, it may make sense to invest instead. My aim here was to reduce the overall interest outgo.

My amortization spreadsheet that I track monthly

This exercise is for those folks who want to prepay, have the resources to prepay, and ultimately want to reduce debt as soon as possible. I plan to close down this loan by end of December 2024, which may or may not be possible. But I feel better than I was in December 2022 because:

• Total loan taken: 30 lakhs
• Total EMI amount paid: 28.6 lakhs
  • Total interest component: 9.5 lakhs
  • Total principal component: 19 lakhs
• Principal outstanding: 11 lakhs
  • Total interest component forecast: 1.3 lakhs

This means at the end of my loan, I would have paid a total interest of roughly 11 lakhs compared to the 44 lakhs had I paid only the EMI without prepayment and/or changing the loan rate.

Let RBI hike the rate as much as they want, but the fact that even a 10% rate won't take my debt dynamic beyond the staggering figures that appeared when I took the loan is what gives me a sound sleep his year end.

I'll be coming back in Dec 2024 to show what has changed and if I was able to close my loan, so that I can go back to baser instincts and get another loan.

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May people have asked for it, so here's the amortization spreadsheet: https://docs.google.com/spreadsheets/d/1HRL8uqNxS7uePpPmJR3Zshv6_rGyWLspZ464I3zkCkY/edit#gid=1

I'm not the owner. I happened to find this in this sub itself.

 

[darrenr]

@pawello If you had the resources to pay, why not take a loan for a lesser amount ? Also, if you had an idea of your cash flow for 5-10 years, all these prepayment gymnastics could have been avoided by simply taking a loan for a 5 year or 10 year tenure.

 

[pawello]

@darrenr I think I should have clarified.

1. When taking the loan, I had resources to pay only 25,000 as EMI, which came to around 30% of my take-home. Not to mention, I needed 30 lakhs and upwards.
2. I had NO idea of surplus money, as I started a side gig during the pandemic. So, all the money that went in was side income, which were very irregular. It didn't make sense to increase EMI just because I had extra money coming in a few months of the year. That would have been foolish.

The original tenure was based on my earning capacity at that time, which is why I want to highlight the thing about surplus money.

 

[darrenr]

@pawello This makes sense now . However, this approach is not one size fits all. If debt is what makes you loose sleep, one should take it as minimal as possible.
You compared interest outgo of 11 lacs vs 44 lacs. But the time value of money is not taken into account. 25k emi now vs 25k emi after 20 years, value of them is completely different.

 

[unikue]

@darrenr Yup, all this herakiri when the OP had the capacity to pay more in EMIs every month, could have just started off with 50k EMI and have significantly smaller tenure to begin with.

And whatever one does, the amount one has prepaid, was still costing around 6% interest(after tax benefits), OP could have made SIGNIFICANTLY more money by having that same money in Mutual Funds.

 

[queenofethopians]

@darrenr Wxactly!!

 

[naga888]

@pawello I really enjoyed reading your insights. My dad took a similar approach, though he wasn't as precise as you in tracking the info. He preferred making lump sum payments whenever there was a substantial profit in the business, all with the goal of repaying the home loan as soon as possible.

 

[pawello]

@naga888 I'm glad he used the approach. The point is to divert surplus (or part of it) to pay off loans in the initial years.

 

[take]

@pawello There is a common misconception that bank charges more interest initially that is not the case actually. Initial days since your principal is high, the interest component will be high...
30 lakhs loan, at 8.95%, the interest would be around 2.685 lakhs. Your emi is around 25k, that is 3 lakhs per year. So naturally you would only repay remaining 31.5k for principal.

Your second year would probably be also around 34-35k. This is completely expected...

 

[take]

Once you understand this, you need to remember that homeloan is one of the cheapest loans. At a time when markets were returning in double digits, performing at all time high, you choose to prepay the homeloan rather than invest in the equity market through mutual funds or stocks. So that way you actually lost out on the opportunity to make higher returns with the cash you had.

Again completely depends on your risk profile but generally, it's always advisable to let homeloan EMIs run its course and use the debt of homeloan to invest in riskier but more rewarding investments.

 

[oregonnowandthen]

@take

At a time when markets were returning in double digits, performing at all time high, you choose to prepay the homeloan rather than invest in the equity market through mutual funds or stocks.

but its hard to time the market. how do you decide / evaluate this?

 

[beebert]

@take Couldn’t agree more. I always hear from people that the bank takes all the interest in the initial days and very minimal amount gets added to the principal.

Like you said this is basic math and one can arrive at this by simple calculations. The bank is not intentionally doing this

 

[christianabdl]

@pawello omg i followed exact same thing few year back...for 27 lacs i would have paid 63...one day just sat and calculated how should i pay early and now i have closed my loan withing 9 years with just 46 lac

 

[timcrinion]

@pawello I thought since banks increase rates during rate increase they also automatically decrease rates when rates lower... Won't people refinance into another bank if that's not the case...

 

[beebert]

@timcrinion ROI is usually two parts repo rate + spread/margin.

So the RoI does reduce automatically but only if the repo rate goes down. The component which usually doesn’t automatically change is the spread or the bank’s margin. For new loans, this spread or margin would be lower and you’d need to pay a small fee for them to revise it for older loans.

 

[oregonnowandthen]

@beebert

For new loans, this spread or margin would be lower and you’d need to pay a small fee for them to revise it for older loans.

so you need to actively keep track of this and reduce?

 

[beebert]

@oregonnowandthen Yeah, keep an eye on the current lowest RoI offered to new customers. It should be available on the bank’s website. If that’s lower than your rate and there has been no changes to repo rate, you’d need to request for the RoI revision.

 

[happyhealthyme88]

@pawello Nothing to comment on your loan journey - to each their own. Some like to be debt free asap and some like to leverage cheap credit. Nothing wrong with both the approach. Congrats on the journey so far.

But damn HDFC loan management is a circus. So you raise a request for rate change, prepayment etc? Thats some 10x level friction.

In SBI you can transfer whatever amount you feel like you can prepay at any time. There is no limit/fee/approvals for prepaying. Just open Yono and transfer it as same account transfer. Rate change is linked to CBLR -they raise it whenever RBI increases it. Not sure if they’ll reduce it automatically when RBI decrease it (I hope they do).

 

[hilarious]

@pawello Great post OP. If you can help us or provide resources on how to create that amortization excel it will be really greatful. Facing similar problem with 27 lakh loan outstanding.

 

[darrenr]

@hilarious There is an app called loan EMI calc. You may get it from there. Also if you ask the bank/NBFC for an amortization schedule, they will provide it.