Which is Financially Smarter: Increasing EMI or Prepaying a Home Loan?

Mariners Realty
Apr 22
2 min read

If you’ve recently received a salary hike or annual bonus, it’s a good time to reassess your home loan repayment strategy. The choice between increasing your EMI amount or making a lump-sum prepayment depends on your financial goals, income stability, and liquidity preferences. Here’s a comparison to help guide your decision:

Option 1: Increasing EMI Amount

Pros:

Faster Loan Repayment: By increasing your EMI, you repay the principal faster, which reduces the total interest paid over the loan’s tenure.
Consistent Commitment: Demonstrates financial discipline, potentially enhancing your credit score.
Adaptability: If your income continues to grow, you can adjust EMI levels accordingly to optimize loan repayment.

Cons:

Reduced Monthly Flexibility: A higher EMI means a larger fixed monthly outflow, which can strain finances if not planned well.

Option 2: Lump-Sum Prepayment

Pros:

Greater Flexibility: You can make prepayments when you have surplus funds like bonuses, without altering your monthly obligations.
Interest Savings: Reduces the outstanding principal, resulting in lower total interest and potentially a shorter tenure.
Preserves Liquidity: Allows you to maintain emergency reserves, unlike higher EMIs which tie up more monthly cash.

Cons:

Opportunity Cost: The funds used for prepayment could be invested elsewhere for potentially higher returns.

Which is Financially Smarter?

It depends on your financial profile:

Stable Income & Willingness for Higher Monthly Commitment:
- If your income is consistent and you can comfortably handle higher EMIs, increasing your EMI is often more effective for minimizing interest and shortening tenure.
Irregular Income or Desire for Flexibility:
- If you prefer financial flexibility or have fluctuating income, prepayment makes more sense. It allows you to repay your loan at your own pace without the burden of a larger monthly commitment.