Owning a home is one of the most significant milestones for any individual – whether it's the comfort of having your own space, or the pride of building wealth for the future. A home loan serves as a vital financial tool to turn this aspiration into reality, allowing homebuyers to access substantial capital upfront while repaying it gradually over time. Strategic home loan repayment helps in maximising savings, maintaining liquidity, and ensuring long-term financial freedom.
Home loan repayments are largely shaped by two critical factors: the equated monthly instalment (EMI) and the loan tenure. While reducing the EMI can ease short-term financial pressure by lowering monthly outgo, it typically results in a longer repayment period and higher total interest paid. On the other hand, maintaining the EMI and shortening the tenure enables faster repayment and significant interest savings. Borrowers must weigh these two options based on their financial goals, cash flow situation, and ability to manage long-term commitments. Choosing the right approach can lead to more efficient loan management and better financial outcomes.
This decision has become even more relevant in light of the recent reduction in lending rates, driven in part by a series of repo rate cuts by the Reserve Bank of India. With interest rates trending lower currently, borrowers – particularly those with floating-rate home loans – are presented with a timely opportunity to reassess their repayment strategy and make informed adjustments. Similarly, in the event of an increase in repo rate and a subsequent rise in home loan interest rates, it is advisable that borrowers relook at their repayment plan and manage their finances accordingly.
EMI versus tenure
Reducing the EMI can be a helpful move for borrowers managing other pressing expenses or seeking more liquidity in the short term. It is particularly useful for young professionals in the early stages of their career, or even families juggling school fees, healthcare costs, or ongoing investments. The lower outgo each month allows for more flexibility, though the extended repayment period adds to the total cost of borrowing.
On the other hand, a shorter tenure ensures that the loan is repaid sooner, significantly reducing the interest burden. This is often the preferred route for those with a steady income who wish to minimise long-term debt. Both approaches come with their trade-offs. With interest rates currently more favourable, borrowers have an opportunity to align their repayment approach with their financial capacity and goals.
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Understanding via an example
Suppose a borrower takes a Rs 40 lakh home loan at an interest rate of 9 percent for a tenure of 20 years. The baseline EMI works out to Rs 35,989, and the total interest paid over the full tenure would be Rs 46.37 lakh. Now, let’s examine how two different scenarios — wherein the interest rate reduces by 0.5 percent to 8.5 percent and increases by 0.5 percent to 9.5 percent — would impact repayment under two strategies: reducing the EMI or shortening the tenure.
| Scenario | Interest Rate | EMI (Rs) | Tenure | Total Interest outgo (Rs lakh) | Interest Difference (Rs lakh) |
| Base Case | 9.0% | 35,989 | 20 years | 46.37 | – |
| Interest Reduced from 9% to 8.5% | |||||
| Lower EMI, keeping tenure intact | 8.5% | 34,713 | 20 years | 43.31 | -3.06 (Saved) |
| Shorter tenure, keeping EMI intact | 8.5% | 35,989 | 18 years 5 months | 39.23 | -7.14 (Saved) |
| Interest Increased from 9% to 9.5% | |||||
| Higher EMI, keeping tenure intact | 9.5% | 37,293 | 20 years | 49.56 | +3.19 (Extra) |
| Longer Tenure, keeping EMI intact | 9.5% | 35,989 | 21 years 9 months | 53.12 | +6.75 (Extra) |
In the event of a rate reduction, it is beneficial for customers to retain the existing EMI, thus helping them reduce the loan tenure and save a substantial amount of interest outgo. However, in case of an increase in interest rate, it is beneficial for customers to retain the tenure and increase their EMI. This will help them minimise the impact of the rate increase by reducing the total interest payment. In some cases, lenders may permit a partial reduction in both the EMI and tenure. The balanced approach could be chosen by borrowers who find this suitable.
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Summarising the situation
There is no one-size-fits-all approach when it comes to choosing between lowering EMIs or reducing loan tenure. If a borrower is experiencing tight cash flows or anticipates additional financial commitments, opting for a lower EMI can ease monthly pressure and enhance liquidity. While this flexibility is valuable for customers, it also contributes to better repayment continuity, which helps lenders maintain a healthy loan book with lower delinquency risk. It is also important to consider the tax impact of interest and principal payments, which can vary for each individual.
As lenders continue to offer revised repayment options in response to market shifts, borrowers are in a strong position to make informed choices. By selecting a repayment approach aligned with their financial comfort and long-term objectives, they not only manage their debt more effectively but also contribute to a more resilient lending ecosystem.
The writer is Chief Financial Officer, PNB Housing Finance.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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