Purchasing a home is one of the most significant financial decisions in a person’s life. While home loans make it easier to own property without needing to pay the entire amount upfront, they come with long-term financial obligations. One of the key factors affecting the total cost of the loan is the principal amount – the original sum borrowed from the lender. By reducing the principal, borrowers can ease their repayment burden, lower the total interest paid over the life of the loan, and potentially pay off their loans faster.
This article explores how to reduce the home loan principal amount and ease your financial obligations.

Understanding Principal Amount in Home Loans

Before diving into the strategies, it's essential to understand what the principal amount in a home loan is. It refers to the original sum of money that you borrow from the lender. When you repay the loan, your monthly EMIs (Equated Monthly Instalments) typically consist of two components: principal repayment and interest charges on the remaining principal balance.
The larger the principal, the more interest you’ll pay over the loan tenure. Therefore, reducing the principal can have a significant impact on lowering the overall cost of your loan. In many cases, homeowners focus solely on home loan interest rates, not realising that optimising the principal amount can yield even greater long-term savings.

Key Strategies to Minimise the Principal Amount

Reducing the principal on your home loan doesn’t just happen at the time of purchase; it can also be achieved during the loan tenure through proactive financial strategies. Here are some tips to reduce the principal amount in a home loan and make your repayment more manageable:

1. Make a Larger Down Payment

One of the most straightforward ways to reduce your principal is to increase your down payment at the time of purchase. Most lenders require a minimum down payment (often 10-20%), but paying more upfront reduces the loan amount and thus the principal. A higher down payment means:

• Lower principal
• Less interest paid over time
• Better chances of loan approval with more favourable terms

If possible, aim to pay 25-30% of the home’s value upfront to significantly lower the burden of repayment. You can use a home loan EMI calculator to estimate how a larger down payment impacts your monthly obligations.

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2. Choose a Property Within Budget

It’s tempting to stretch your budget for a dream home, but doing so increases your loan principal and, subsequently, your interest liability. Instead, choose a property that aligns with your budget and long-term financial goals. This approach helps you:

• Borrow only what you need
• Optimise your monthly instalments
• Maintain financial flexibility for other life goals

Opting for a modestly priced property gives you the option to make prepayments or invest surplus funds elsewhere.

3. Prepay Whenever Possible

One of the most effective strategies during the loan tenure is prepayment – making additional payments towards your loan principal beyond your regular EMIs. Even small lump-sum payments can:

• Help reduce the principal balance
• Shorten the loan tenure
• Save you from paying additional interest

You can use bonuses, incentives, or tax refunds to make periodic prepayments. According to RBI guidelines, lenders cannot levy prepayment penalties on floating-rate home loans taken for non-business purposes. However, check with your lender to confirm if any conditions apply.

4. Opt for Shorter Loan Tenures

Though longer loan tenures reduce monthly EMIs, they increase the overall interest paid over time. A shorter tenure, while resulting in slightly higher EMIs, reduces your total interest outgo and helps you repay the principal faster. Benefits include:

• Faster loan clearance
• Lower overall interest burden
• Improved creditworthiness post-loan

If you have a steady income, opting for a 15- or 20-year tenure instead of 30 years can result in substantial savings.

5. Increase Your EMI Amount

Another practical way to reduce the principal faster is to increase your EMI amount whenever your income grows or expenses reduce. Even a small increase in your monthly instalment can:

• Bring down the principal more quickly
• Reduce the overall interest paid
• Help you close the loan ahead of schedule

Consider reviewing your budget periodically and adjusting your EMI upward when feasible. However, check with your lender for any conditions or charges associated with modifying your repayment structure.

6. Avoid Additional Loans or Refinancing for a Larger Amount

While refinancing can be beneficial in some scenarios (especially for lowering interest rates), avoid refinancing your loan for a higher amount or taking out additional top-up loans. Increasing the loan size inflates your principal and may negate prior efforts to reduce it. Stay focused on minimising liabilities rather than extending them.

Conclusion

Reducing the principal amount in your home loan is one of the most impactful strategies for saving money in the long term and achieving financial freedom sooner. Whether you're at the start of your homebuying journey or already repaying a loan, adopting proactive measures like higher down payments, regular prepayments, and strategic budgeting can bring long-term benefits.
SMFG Grihashakti supports your homeownership goals with financing of up to 90%* of the property’s value, offering features like competitive interest rates, flexible repayment tenures, and swift loan processing (subject to eligibility and documentation). Apply online for a home loan today or visit your nearest branch to learn more.