The Reserve Bank of India (RBI) has given good news to home loan borrowers by cutting the repo rate by 25 basis points each in RBI MPC held in February and April, which is a cumulative reduction in Repo Rate by 50 basis points this year. Sooner or later, banks have to pass on the benefits of the lower repo rate to their home loan borrowers so that their loan EMIs can be reduced.Pradeep B, Business Head, Housing Loans and Micro Mortgages at Ujjivan Small Finance Bank, says, “The successive repo rate cut by RBI could immediately ease the burden of floating rate home loan borrowers by enabling banks to pass on the rate cut at the specified reset date. This facilitates the customers either to lower the EMIs or the tenure, thereby reducing the financial liability of the customers and boosting the affordability of the customers.”
In the coming days, banks will contact customers, asking them to choose between reducing their current EMI and home loan tenure. ET Wealth Online decodes which option will save you more money in the future.
Also Read: Good time for borrowers as their home loan EMIs to come down further due to RBI repo rate cut
Reduce EMI or home loan tenure: Which will save you more money?
Rather than reducing your EMI, if you opt for the same EMI to continue despite the interest rate reduction will give you higher savings on interest payment. Adhil Shetty, CEO of Bankbazaar.com, says, “While both choices provide some benefit, maintaining the current EMI and reducing the tenure results in greater long-term savings. A shorter tenure lowers total interest outgo and helps close the loan faster. In contrast, reducing the EMI eases monthly payments but increases the total interest paid.”
Let us understand it in terms of numbers.
How much will you save if you opt to reduce home loan tenure?
Here is an example of how choosing a reduction in home loan tenure instead of reducing EMI can help you save more.Suppose you are a home loan borrower whose outstanding loan amount is Rs 40 lakh. You have taken a home loan for 20 years at 8.5%. The home loan is a floating rate one where the interest rate is linked to an external benchmark, i.e., repo rate. As the RBI has reduced the repo rate by 50 basis points since February, your home loan interest rate will come down to 8%.
If you choose home loan EMI reduction
The interest rate applicable now on your home loan has come down. You have chosen EMI reduction instead of reducing your home loan tenure. The original EMI on your home loan (before repo rate cut) is Rs 34,713. The revised EMI will be Rs 33,458 (after two repo rate cuts). On your monthly EMI, you will save Rs 1,255. Assuming that the interest rate remains 8% for the tenure of 20 years, you will save Rs 3.01 lakh on interest payments on an outstanding loan of Rs 40 lakh.
If you choose home loan tenure reduction
On the other hand, instead of reducing your EMI by Rs 1,255, you opt to reduce your current home loan tenure of 20 years. The bank tells you that if you keep paying your original EMI of Rs 34,713, your home loan tenure will be 18.33 years. By choosing this option, you end up closing your loan 20 months earlier.
As you will not be paying home loan EMIs for 20 months, you will save Rs 6.93 lakh on the total interest payments.
In fact, by choosing the home loan tenure reduction option, you will end up saving Rs 3.92 lakh more than if you had chosen EMI reduction.
| Particulars | Option A: Original Loan | Option B: Same Loan, Lower Rate | Option C: Same Loan, Same EMI, Lower Rate |
| Loan | ₹ 40,00,000 | ₹ 40,00,000 | ₹ 40,00,000 |
| Rate | 8.50% | 8.00% | 8.00% |
| Tenor (In Months) | 240 | 240 | 220 |
| EMI | ₹ 34,713 | ₹ 33,458 | ₹ 34,713 |
| Interest | ₹ 43,31,103 | ₹ 40,29,825 | ₹ 36,37,372 |
| Interest Saved | – | ₹ 3,01,278 | ₹ 6,93,731 |
| Tenor reduced by months | – | – | 20 |
Numbers approximate. Actual numbers may depend on the lender’s unique policies. Source: Bankbazaar.com
Also Read: FD investors should book their fixed deposits now to get higher interest rates
Factors to decide how to choose between loan EMI reduction or tenure reduction
Not every individual may be able to opt for the reduction in home loan tenure due to certain financial obligations. Retired (Col) Sanjeev Govila, Certified Financial Planner and CEO of Hum Fauji Initiatives, says, “The math favours home loan tenure reduction for maximum savings. 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. However, if you are facing budget constraints or want to redirect funds toward other financial priorities, opting for reduced EMIs is a better option. Some lenders allow you to reduce both EMI and tenure partially. This middle path provides some immediate relief while still capturing long-term interest savings. Hence, you should talk to your lender, look at your current cash flow needs and long-term financial goals to decide accordingly.”
Concurring the view, Amit Prakash Singh, Co-Founder & Chief Business Officer, Urban Money, says, “Reducing the loan tenure generally proves more cost-effective, as it minimizes the total interest paid. For borrowers who can comfortably handle higher EMIs, this option aligns well with long-term financial health. On the other hand, if maintaining financial flexibility is a higher priority, lowering the EMI may be the more practical choice. Ultimately, the right decision comes down to individual financial stability and objectives. Borrowers should carefully evaluate their income, spending patterns, and broader financial goals before deciding which approach best suits their needs.”
