Understanding How Home Loan Principal Repayment Works

Buying a home is a big financial decision, and for most of us, a home loan is the way to make that dream come true. When you take out a home loan, you will often hear terms like "principal," "interest," and "EMI." But what do these mean, and how does home loan principal repayment work? In this article, we will break down everything you need to know about it, using simple language.

What is home loan principal repayment?

When you take a home loan, you borrow a certain amount from the bank or lender. This amount is called the principal. Over the years, you pay back this principal along with interest. The process of paying back the borrowed amount, or the principal, is known as home loan principal repayment.

In simple terms, when you repay your home loan, a part of the payment goes towards the principal, and the rest goes toward the interest. As time passes, the amount you pay toward the principal increases, while the interest portion reduces.

How does EMI work?

EMI stands for equated monthly installment. It is the fixed amount you pay to the bank or lender every month. Each EMI has two components: the principal repayment and the interest payment. In the beginning, most of your EMI goes towards paying the interest, and only a small part goes to the principal. However, as you continue to make payments, a larger portion of the EMI will start covering the principal.

EMIs are calculated using a simple formula:

EMI=P×r×(1+r)n/(1+r) n - 1

Where:

• P = Principal loan amount

• r = Monthly interest rate

• n = Loan tenure in months

Understanding the EMI breakdown

At the start of your home loan, the major part of your EMI is used to pay off the interest. For example, if your EMI is Rs. 30,000, around Rs. 24,000 may go toward interest, and only Rs. 6,000 will cover the principal. As you progress with the repayments, the proportion changes. By the end of your loan tenure, most of the EMI will be directed towards the principal repayment.

What is prepayment, and how does it help?

Prepayment means to pay a chunk of the principal amount in one go, over and above your regular EMIs. This helps you reduce the outstanding principal, which means that your future interest payments will decrease.

Let us say you have an outstanding principal of Rs. 20 lakh, and you make a prepayment of Rs. 5 lakh. Now, you will pay interest on only Rs. 15 lakh, significantly reducing your future EMIs or the loan tenure. Prepayment is an excellent option if you have some extra funds available, like from a bonus or salary hike.

Additional read: Home loan prepayment calculator

Impact of tenure on principal repayment

The tenure of your home loan plays a big role in how quickly you repay the principal. A longer tenure means lower EMIs, but slower principal repayment. On the other hand, a shorter tenure means higher EMIs but faster repayment of the principal. For example:

• A 10-year loan will repay the principal faster, but the EMIs will be higher.

• A 20-year loan will have lower EMIs, but you will pay more interest over time, and the principal repayment will be slower.

It’s important to strike a balance between what you can afford and how fast you want to clear your loan.

Benefits of early principal repayment

Repaying your home loan principal early can offer several benefits:

1. Lower interest payments: The earlier you reduce your principal, the less interest you will pay over the life of the loan. This can save you lakhs of rupees in the long run.

2. Faster loan closure: By repaying the principal faster, you can finish your loan sooner. This gives you financial freedom earlier than expected.

3. Improved credit score: Regular repayments and clearing the principal early can improve your credit score, making you eligible for better loan terms in the future.

Additional read: Home loan repayment options

Tax benefits on principal repayment

The good news is that you can also enjoy tax benefits on home loan principal repayment. Under Section 80C of the Income Tax Act, you can claim a deduction of up to Rs. 1.5 lakh every year on the principal repayment. This helps you save on your taxable income, making home loans an even better option for owning property.

How to keep track of your home loan principal repayment

To make sure you are on top of your loan, regularly check your loan statement. It will show you how much of your EMI is going towards the principal and how much towards the interest. Most lenders provide these statements online, so it is easy to track the progress of your repayment.

Explore Bajaj Housing Finance Home Loan

If you are considering a home loan, Bajaj Housing Finance Home Loan offers flexible options with low interest rates, making your principal repayment journey smoother. With a loan amount of up to Rs. 15 crore* and tenure options that fit your financial needs, Bajaj Housing Finance makes homeownership more accessible.

Before taking a home loan, you can use our home loan EMI calculator to check how much you will pay every month. It helps you understand how different tenures and interest rates affect your EMI and principal repayment. You can experiment with different loan amounts and tenures to find what suits your budget best.

Here are some advantages of choosing a home loan with us:

1. High loan limits: Make your homeownership dream a reality with a loan of up to Rs. 15 crore*.

2. Competitive interest rates: Enjoy EMIs starting at just Rs. 741/lakh*, with interest rates as low as 8.25%* p.a.

3. Swift approval: Have your loan application approved in as little as 48 Hours*, and often even faster.

4. No foreclosure fees*: If you opt for a floating interest rate, you can pay off or prepay your loan without incurring any extra charges.

5. Easy application process: Our convenient document pickup service at your doorstep simplifies the application, so you will not have to make multiple trips to the branch.

Do not wait—apply for a Bajaj Housing Finance Home Loan today and turn your dream of homeownership into a reality.