Reduce Home Loan EMI or Cut Tenure? What Will Save You More on Interest After RBI Repo Rate Cut

The Reserve Bank of India (RBI) has recently cut the repo rate by a total of 50 basis points through two consecutive reductions of 25 basis points each in February and April 2025, bringing the rate down from 6.5% to 6.0% Economic Times. This rate cut benefits home loan borrowers as banks typically pass on these reductions to their customers.

When your home loan interest rate decreases, you have two primary options:

1. Reduce your EMI while keeping the original loan tenure
2. Maintain your current EMI and reduce the loan tenure

Which Option Saves More Interest?

The clear mathematical winner is reducing the loan tenure while maintaining your current EMI.

Let’s examine why with concrete examples and calculations.

Example 1: Rs 40 Lakh Home Loan

For a home loan of Rs 40 lakh with an original interest rate of 8.5% that gets reduced to 8.0% after the RBI rate cut:

Original scenario (8.5% interest rate):

• Loan amount: Rs 40 lakh
• Tenure: 20 years
• EMI: Rs 34,713

Option 1: Reduce EMI, keep tenure

• New EMI: Rs 33,458 (saves Rs 1,255 per month)
• Tenure: Remains 20 years
• Total interest savings: Rs 3.01 lakh

Option 2: Keep EMI, reduce tenure

• EMI: Remains Rs 34,713
• New tenure: 18 years and 4 months (reduced by 20 months)
• Total interest savings: Rs 6.93 lakh

Additional savings with tenure reduction: Rs 3.92 lakh Economic Times.

Example 2: Rs 80 Lakh Home Loan

Let’s consider another example with a larger loan amount:

For a home loan of Rs 80 lakh for 25 years with interest rate reducing from 8.5% to 8.0%:

Original scenario (8.5% interest rate):

• Loan amount: Rs 80 lakh
• Tenure: 25 years (300 months)
• EMI: Rs 65,068
• Total interest over 25 years: Rs 1,15,20,400

Option 1: Reduce EMI, keep tenure

• New EMI: Rs 61,822 (saves Rs 3,246 per month)
• Tenure: Remains 25 years
• Total interest: Rs 1,05,46,600
• Total interest savings: Rs 9,73,800

Option 2: Keep EMI, reduce tenure

• EMI: Remains Rs 65,068
• New tenure: Approximately 23.1 years (reduced by 23 months)
• Total interest: Rs 1,00,23,836
• Total interest savings: Rs 14,96,564

Additional savings with tenure reduction: Rs 5,22,764

Why Tenure Reduction Saves More Interest

Tenure reduction saves more interest due to two key mathematical principles:

1. Accelerated principal repayment: When you maintain the same EMI despite a lower interest rate, more of each payment goes toward the principal amount. This creates a compounding effect as the principal reduces faster.
2. Elimination of future interest payments: By shortening the loan term, you eliminate numerous future payments entirely. As Retired (Col) Sanjeev Govila, Certified Financial Planner, explains: “When you maintain your original EMI despite lower interest rates, every extra rupee goes toward principal reduction, creating a powerful compounding effect that accelerates your path to becoming debt-free. Every month you shave off your tenure, you cut off interest bleeding” Economic Times.

Factors to Consider When Choosing Between EMI and Tenure Reduction

Despite the clear financial advantage of tenure reduction, it’s not the right choice for everyone. Consider these factors:

When to Choose EMI Reduction:

1. Tight monthly budget: If you’re struggling with month-to-month expenses and need immediate cash flow relief.
2. Other high-interest debt: If you have credit card or personal loan debt with higher interest rates, the monthly EMI savings could be redirected to pay down those costlier loans.
3. Investment opportunities: If you believe you can invest the monthly savings at returns higher than your home loan interest rate.
4. Income uncertainty: If your income is variable or unstable, lower EMIs provide greater financial flexibility.

When to Choose Tenure Reduction:

1. Long-term wealth building: If becoming debt-free sooner is a priority in your financial plan.
2. Stable finances: If your monthly budget can comfortably handle the current EMI amount.
3. Nearing retirement: If you want to clear debts before your earning years end.
4. No other high-interest debt: If your home loan is your primary or only debt.

Steps to Take After a Repo Rate Cut

1. Check if your loan is affected: Confirm if your loan is linked to an external benchmark like the repo rate. Public sector banks typically pass on these cuts automatically, while some private lenders might not.
2. Contact your lender: If you haven’t seen a reduction applied to your account, reach out to your relationship manager or customer service.
3. Request your preference: Clearly communicate whether you prefer EMI reduction or tenure reduction.
4. Revise your repayment strategy: Use the rate cut as an opportunity to reassess your overall loan repayment plan.

Conclusion

Mathematically, reducing your loan tenure while maintaining the same EMI will save you significantly more on interest payments compared to reducing the EMI and keeping the original tenure. In our examples, tenure reduction saved an additional Rs 3.92 lakh on a Rs 40 lakh loan and Rs 5.22 lakh on an Rs 80 lakh loan.

However, the right choice depends on your personal financial situation, goals, and cash flow needs. If you need immediate monthly relief, EMI reduction might be preferable despite the lower long-term savings. If you can comfortably maintain your current EMI, choosing tenure reduction will substantially reduce your total interest cost and help you become debt-free sooner.

Remember that interest rates are cyclical, and what works best today might need to be reassessed if rates change significantly in the future.