Home Loan Hack: Pay 1 Extra EMI Yearly Using Equity Savings Funds
Discover how this simple strategy can shorten your 20-year home loan to just 14-15 years and save you ₹15+ lakhs in interest payments
The Power of One Extra EMI
Every home loan borrower dreams of becoming debt-free, but few realize how dramatically one simple change can transform their financial future. Paying just one extra EMI per year can reduce a 20-year loan to 14-15 years and save you lakhs in interest.
💡 The Reality Check:
Most banks have minimum prepayment requirements (usually ₹25,000-₹1,00,000), making it impossible to prepay small monthly amounts directly. This creates a gap between your monthly savings capacity and the bank’s requirements.
The Smart Solution: Equity Savings Funds
Instead of letting your monthly savings sit idle in a low-interest savings account, invest them in Equity Savings Funds (ESFs) through SIP. These funds provide better returns than FDs with relatively lower risk, helping you aggregate your monthly savings efficiently.
Risk: Very Low
Liquidity: Instant
Tax: As per income slab
Best for: Emergency funds only
Risk: Low
Liquidity: Medium (with penalty)
Tax: As per income slab
Best for: Conservative investors
Risk: Moderate
Liquidity: 2-3 working days
Tax: 10% LTCG over ₹1L/year
Best for: Loan prepayment strategy
Your 5-Step Implementation Plan
Calculate Your EMI
Check your loan statement for your current EMI amount. This becomes your yearly prepayment target.
Start Monthly SIP
Divide your EMI by 12. Start a Systematic Investment Plan (SIP) in an Equity Savings Fund with this amount.
Let It Grow
Your money grows at 7-9% instead of 3-4% in savings accounts. Monitor but don’t panic about short-term fluctuations.
Redeem Annually
After 11-12 months, redeem the amount (which should now equal or exceed your EMI) from the fund.
Make Extra Payment
Use the redeemed amount to prepay your home loan as one extra EMI. Repeat yearly until loan closure.
5-Year Growth Comparison: Savings vs. Investment
Let’s assume you save ₹5,000 monthly towards your goal of paying one extra EMI of ₹60,000 yearly. Here’s how different approaches compare:
| Year | Monthly Saving | Savings Account @4% | Fixed Deposit @6% | Equity Savings Fund @8% | Extra Money Available |
|---|---|---|---|---|---|
| 1 | ₹5,000 | ₹61,232 | ₹61,967 | ₹62,764 | ₹1,532 extra |
| 2 | ₹5,000 | ₹1,24,880 | ₹1,27,286 | ₹1,30,064 | ₹5,184 extra |
| 3 | ₹5,000 | ₹1,91,073 | ₹1,96,210 | ₹2,02,137 | ₹11,064 extra |
| 4 | ₹5,000 | ₹2,59,887 | ₹2,69,038 | ₹2,79,388 | ₹19,501 extra |
| 5 | ₹5,000 | ₹3,31,399 | ₹3,46,094 | ₹3,62,256 | ₹30,857 extra |
Key Insight: After 5 years, the ESF approach gives you ₹30,857 more than the savings account method. That’s essentially a free extra prepayment in year 6!
Impact on Your Home Loan: Real Numbers
Let’s analyze a ₹50 lakh home loan at 8.5% interest with a 20-year tenure:
| Strategy | Original Loan Tenure | New Tenure with 1 Extra EMI | Time Saved | Interest Saved |
|---|---|---|---|---|
| No Prepayment | 20 years | 20 years | 0 years | ₹0 saved |
| Traditional Savings Method | 20 years | 15 years 4 months | 4 years 8 months | ₹13.2 lakhs |
| Equity Savings Fund Strategy | 20 years | 14 years 6 months | 5 years 6 months | ₹15.7 lakhs |
🚀 The Bottom Line:
By using the Equity Savings Fund approach, you gain an extra 10 months of freedom and save ₹2.5 lakhs more compared to the traditional savings method. That’s 5.5 years of your life back and ₹15.7 lakhs staying in your pocket instead of going to the bank.
Ready to Shorten Your Home Loan Journey?
Start your SIP in an Equity Savings Fund today. Begin with as little as ₹500/month and take control of your financial future.
Note: Mutual fund investments are subject to market risks. Past performance is not indicative of future returns. Please read all scheme related documents carefully. Consider consulting a financial advisor before investing.
Frequently Asked Questions
🤔 What if the market goes down when I need to redeem?
Equity Savings Funds are designed to be less volatile. Even in negative equity markets, the debt and arbitrage portions (60-70% of the fund) provide stability. Historical data shows they’ve consistently outperformed FDs over any 3-year period.
📅 When exactly should I redeem my investment?
Plan your redemption 1-2 months before your intended prepayment date. This gives you time for the transaction to process and avoids last-minute stress. Most funds process redemptions within 2-3 working days.
💰 Are there any tax implications?
Yes, but favorable ones. Investments held over 1 year attract only 10% tax on gains over ₹1 lakh per year (Long Term Capital Gains). For most people, this is lower than their income tax slab rate applied to FD interest.
🏦 Will my bank allow this prepayment?
Most banks allow unlimited prepayments for floating-rate home loans without any penalty. For fixed-rate loans, check your agreement as some may have prepayment charges. Always get written confirmation from your bank before starting.
⚠️ Important Disclaimer
This blog post is for educational purposes only. The information provided does not constitute financial advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The returns mentioned are based on historical performance and are not guaranteed. Past performance is not indicative of future results. Consider consulting with a SEBI-registered financial advisor before making any investment decisions.
Home loan prepayment rules vary by bank and loan type. Always check with your bank regarding prepayment policies, minimum amounts, and any applicable charges before implementing this strategy.
