Should You Reduce Your Home Loan EMI or Cut Tenure After RBI Repo Rate Cut?
The Reserve Bank of India (RBI) has recently reduced the repo rate by a cumulative 50 basis points (bps), with significant implications for home loan borrowers. As banks adjust their lending rates accordingly, homeowners are faced with a crucial decision: should they opt to reduce their Equated Monthly Instalment (EMI) or shorten the tenure of their home loan?
RBI Repo Rate Cut: The Implications for Borrowers
In February and April 2025, the RBI announced a 50 bps cut in the repo rate, which is the interest rate at which the RBI lends to commercial banks. This move is intended to make borrowing more affordable and to stimulate economic activity. As a result, banks are expected to pass some of these benefits onto their home loan borrowers through lower interest rates.
Pradeep B, Business Head of Housing Loans at Ujjivan Small Finance Bank, emphasized that this rate cut presents an opportunity for borrowers to either lower their EMI or reduce their loan tenure, ultimately easing their financial burden.
Evaluating the Options: EMI Reduction vs Tenure Reduction
As banks reach out to their customers for these choices, it’s essential to understand the financial impact of each option.
Reducing Your EMI
If you decide to reduce your EMI with the new rate of 8%, the monthly payment on a hypothetical home loan of ₹40 lakh over 20 years will be adjusted from ₹34,713 to ₹33,458, leading to a monthly saving of ₹1,255. Over the full term of the loan, this could translate into approximately ₹3.01 lakh saved in total interest payments—an appealing immediate relief for many.
Cutting Down the Loan Tenure
Conversely, if you choose to maintain your original EMI of ₹34,713 while benefiting from the lower interest rate, you can reduce your loan tenure. In the same scenario described above, opting for this route would shorten your loan from 20 years to about 18.33 years, meaning you would pay off your loan roughly 20 months earlier. This decision could lead to savings of about ₹6.93 lakh on total interest payments—making it the more financially advantageous option in the long run.
Breaking Down the Savings
To put these options into perspective, let’s summarize the differences:
| Particulars | Original Loan | Revised Loan (Lower EMI) | Revised Loan (Shorter Tenure) |
|---|---|---|---|
| Loan Amount | ₹40,00,000 | ₹40,00,000 | ₹40,00,000 |
| Interest Rate | 8.50% | 8.00% | 8.00% |
| Tenure (Months) | 240 | 240 | 220 |
| EMI | ₹34,713 | ₹33,458 | ₹34,713 |
| Total Interest Paid | ₹43,31,103 | ₹40,29,825 | ₹36,37,372 |
| Interest Saved | – | ₹3,01,278 | ₹6,93,731 |
| Tenure Reduction (Months) | – | – | 20 |
Choosing What’s Best for You
Each borrower’s situation is unique, and the right choice depends on multiple factors, including financial circumstances and long-term goals. Financial experts like Sanjeev Govila and Amit Prakash Singh advocate for the tenure reduction option as it leads to greater overall savings on interest.
However, if someone is more focused on improving cash flow or is currently facing budget constraints, reducing monthly EMI may be a more practical option. Some lenders also offer flexibility, allowing borrowers to partially reduce both EMI and tenure.
Conclusion
As borrowers navigate these options following the RBI’s rate cut, a savvy approach requires careful consideration of one’s financial health and future objectives. Engaging with lenders to explore available options is advisable, ensuring that the decision aligns with your financial priorities and long-term planning. Remember, the key is to strike a balance between immediate financial relief and long-term savings.
Share this article:
