The recent RBI repo rate cut of 50 basis points has prompted many banks to lower their home loan interest rates. This development offers borrowers a chance to save money, but the full spectrum of benefits remains underutilized. Two primary options emerge for borrowers following an interest rate reduction: lowering EMIs or shortening the loan tenure. Understanding which strategy yields optimal savings is crucial.
The Numerical Picture: Savings Explained
Consider a home loan of ₹50 lakh at 9% interest, repayable over 20 years (240 months). The monthly EMI stands at approximately ₹44,986.
Post the 50 bps rate cut, if the interest rate drops to 8.5%, the EMI could reduce to ₹43,391, saving ₹1,595 each month.
However, borrowers face a choice:
- Option 1: Reduce the EMI Amount — paying less monthly but keeping the loan tenure unchanged.
- Option 2: Maintain the EMI but Shorten the Loan Tenure — continuing with prior EMI payments but repaying faster.
Why the Tenure Reduction Option Is Less Spoken About
While lowering EMIs eases monthly cash outflow, reducing tenure results in paying less interest overall by shortening the time the bank earns interest. Since bank revenue is tied to the interest over time, some lenders may not emphasize the tenure reduction option despite RBI encouraging transparency in such matters.
The Impact of Shortening Tenure: A Closer Look
If you choose to keep your EMI at ₹44,986, the loan tenure decreases from 240 to about 220 months, edging your loan payoff 1 year and 8 months earlier.
Comparing Interest Paid:
| Scenario | Monthly EMI (₹) | Tenure (Months) | Total Interest Paid (₹) | Savings (₹) |
|---|---|---|---|---|
| No Rate Cut | 44,986 | 240 | 57,96,711 | – |
| EMI Reduced | 43,391 | 240 | 54,13,840 | 3,82,871 |
| Tenure Reduced | 44,986 | 220 | 48,51,999 | 9,44,712 |
Reducing tenure saves nearly ₹9.45 lakh in interest compared to the base scenario—more than double the savings achieved by simply lowering EMI payments.
Choosing the Right Strategy for Your Situation
While mathematically, shortening tenure maximizes interest savings, practical factors must guide your choice:
- Budget Constraints or High Debt-to-Income Ratio: Lowering EMI may be necessary to maintain manageable monthly finances.
- Adequate Cash Flow: Opting for tenure reduction can accelerate debt freedom and substantially reduce total repayment.
Ultimately, the decision depends on personal financial health and goals. Consulting a qualified financial advisor can provide tailored insights and optimize outcomes.
Make Your Home Loan Work Smarter
The RBI rate cut presents an invaluable opportunity to reassess your home loan approach. While lower EMIs feel gratifying, embracing the less conspicuous but more potent strategy of shortening your tenure can significantly enhance financial freedom. Aligning your repayment strategy with your capacity and aspirations ensures you unlock the highest possible benefit from current rate reductions, transforming your home loan from a burden into a stepping stone toward lasting wealth.
