Since the recent repo rate cut of 50 basis points by the RBI, several banks have responded by lowering their lending rates, creating a buzz among home loan borrowers. This reduction presents a potential opportunity to save on EMIs, but many borrowers overlook a more strategic move that can yield even greater savings. In this article, we’ll break down the financial impact of an interest rate cut and explore two key strategies—reducing EMIs or shortening home loan tenure, to help you maximise your savings and minimise your interest burden.
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How much can you actually save after banks cut home loan interest rate?
Let us understand with numbers
Imagine you have taken a home loan of ₹50 lakh at an interest rate of 9% for a tenure of 240 months (20 years). With these figures, your EMI would be approximately ₹44,986.
Now, after the repo rate cut of 50 bps, if your bank reduces your home loan interest rate to 8.5%, your EMI will drop to ₹43,391. You’ll be able to save ₹1,595 per month.
But there’s a catch – Whenever there is an interest rate cut, home borrowers are left with two options –
- Reduce home loan EMI amount
- Reduce home loan tenure
Everyone talks about option one, cutting down on EMI amount. Yes, of course, it will save borrowers some money. But option two which is to cut down loan tenure is not known to many borrowers. Part of the reason is – banks wouldn’t like it.
See, a bank’s primary source of income is interest. They give you time in exchange for money.
So when you try to cut down on the loan tenure, banks frown. Why? Because the faster you repay the loan, the fewer EMIs you pay—and with that, the bank earns less interest overall. So typically, some banks will hide it from you. Despite the RBI guideline which explicitly notified banks to inform borrowers about this option.
Let’s talk more about the second option of reducing home loan tenure.
Reducing tenure means continuing with the same EMI amount even after the interest rate cut, but shortening the number of months over which you repay the home loan. In simpler words, your monthly EMI amount stays the same, but your loan ends sooner.
Let’s revisit our earlier example.
You had taken a home loan of ₹50 lakh at 9% interest for 240 months. After the rate cut, instead of reducing your EMI to ₹43,391, you decide to continue paying ₹44,986 per month. In this case, your home loan tenure reduces from 240 months to approximately 220 months. Your loan will end 1 year and 8 months earlier.
Home loan: How much interest you will save in each case?
Let’s go back to the numbers.
Initially, with no interest rate cut, the loan amount is ₹50,00,000, the interest rate is 9%, and the tenure is 240 months. In this case, the total interest paid over the loan term would be ₹57,96,711.
Now, after a 50 basis points rate cut (i.e., the interest rate drops from 9% to 8.5%):
Option 1: Reduce home loan EMI
If you reduce your EMI to ₹43,391 (from ₹44,986), you save ₹1,595 per month. The total interest paid will be ₹54,13,840 — a savings of ₹3,82,871 compared to the original ₹57,96,711.
Option 2: Reduce home loan tenure
If you keep the EMI unchanged at ₹44,986 and reduce the home loan tenure, your total interest paid will be ₹48,51,999 — a savings of ₹9,44,712 compared to the original ₹57,96,711.
Comparison:
Reducing tenure saves you ₹9,44,712 in total interest, whereas reducing EMI saves ₹3,82,871. Therefore, tenure reduction yields an additional saving of ₹5,61,841 over EMI reduction.
Conclusion:
Choosing to reduce your loan tenure instead of lowering your EMI results in the highest interest savings — approximately ₹9.45 lakh in total.
Home loan: EMI cut vs. shorter tenure, which saves you more interest?
| Scenario | Monthly EMI (₹) | Tenure (Months) | Interest Paid | Interest Savings |
|---|---|---|---|---|
| No Rate Cut | 44,986 | 240 | 57.97 L | – |
| EMI Reduced | 43,391 | 240 | 54.14 L | 3.83 L |
| Tenure Reduced | 44,986 | 220 | 48.52 L | 9.45 L |
So, Which Option Should You Choose?
From a purely mathematical perspective, reducing your loan tenure will always result in greater interest savings. But, the right choice depends on your financial circumstances.
If you are currently experiencing budget constraints, or if your Debt-to-Income (DTI) ratio is already high, it may be more prudent to reduce your EMI and ease the monthly cash flow pressure. On the other hand, if your cash flow allows you to maintain the current EMI, choosing a shorter tenure will substantially reduce your total repayment amount.
Ultimately, the decision should be based on your current finances and long-term goals. The most effective step you can take is to consult with a 1 Finance’s qualified financial advisor who can guide you based on a complete understanding of your financial profile.
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