Money and tax
Home Loan Prepayment: Reduce the EMI or the Tenure?
By the AllToolsDesk team · Updated
When you make a part-prepayment on a home loan, the bank asks one question: should the monthly EMI go down, or should the loan finish sooner? The choice changes how much interest you save, often by lakhs of rupees.
The example loan
Take a ₹50 lakh home loan at 8.5% a year for 20 years. The EMI is ₹43,391, and over 20 years you would pay ₹54.14 lakh in interest, more than the loan itself. Now suppose you prepay ₹5 lakh at the end of the second year, from a bonus or savings.
| No prepayment | Reduce tenure | Reduce EMI | |
|---|---|---|---|
| Monthly EMI | ₹43,391 | ₹43,391 | ₹38,864 after prepayment |
| Loan length | 240 months | 195 months | 240 months |
| Total interest | ₹54.14 lakh | ₹39.57 lakh | ₹49.36 lakh |
| Interest saved | — | ₹14.57 lakh | ₹4.78 lakh |
Keeping the EMI and cutting the tenure saves three times as much interest, and the loan ends three years and nine months early.
Small yearly prepayments add up
A one-time lump sum is not the only option. On the same loan, prepaying ₹1 lakh at the end of every year while keeping the EMI unchanged clears it in 168 months instead of 240, six years early. You would prepay ₹13 lakh in total over those years and save ₹18.55 lakh in interest.
The earlier a prepayment is made, the more it saves, because in the first years most of each EMI goes to interest. A prepayment in year two removes interest that would otherwise be charged for eighteen more years.
Why cutting the tenure saves more
Interest is charged on the outstanding balance every month. A prepayment lowers the balance either way. If you keep paying the same EMI, the part of each EMI that goes to principal grows faster, and the balance keeps falling faster for the rest of the loan. If you lower the EMI instead, you pay the loan down at the original slower pace, just from a smaller starting point.
When reducing the EMI makes sense
- Your income has fallen or is uncertain, and a lower fixed outgoing gives you breathing room.
- You plan to invest the monthly difference at a return clearly above the loan rate, and you will actually do it every month.
- You need the lower EMI to qualify for another loan.
Many banks let you choose at each prepayment, and some let you lower the EMI later on request. If you are unsure, reducing the tenure and keeping an emergency fund is the safer default.
Before you prepay
- Keep six months of expenses aside first. Money paid into a loan is hard to get back.
- Check charges. RBI rules do not allow banks to charge a prepayment penalty on floating-rate loans taken by individuals for non-business purposes; fixed-rate loans may carry one.
- Compare with tax benefits. In the old regime, up to ₹2 lakh of home loan interest a year is deductible, which slightly lowers the effective rate.
- Get the revised schedule from the bank in writing after the prepayment.