Whenever the Repo Rate is revised by the Reserve Bank of India (RBI), there is a direct change in the Repo Linked Lending Rate (RLLR / EBLR) of all the commercial banks of the country. Under the new rules, most home loans have floating interest rates linked to an external benchmark. In such a situation, when the Central Bank cuts the policy rates, the biggest dilemma in the minds of common borrowers is whether to reduce their monthly installment (EMI) or reduce the total tenure of the loan to reduce their monthly expenses. Most banks offer EMI reduction by default, but just a written demand made to the bank by understanding the financial mathematics can directly save you interest worth lakhs of rupees. Reducing EMI vs Reducing Tenure: What is the basic difference between the two? Whenever the bank reduces your interest rate by 0.25% or 0.50%, you have two options: Option 1: Get the EMI reduced (keep the loan tenure the same): Your monthly EMI will be slightly reduced. This will save you ₹ 1,000 to ₹ 2,500 in immediate cashflow every month, but your loan will continue to stretch for 20 or 25 years and the bank will keep charging you interest for a long time. Option 2: Continue the old EMI and get the tenure reduced: You ask the bank not to make any reduction in your old EMI amount. Due to falling interest rates, every month a large part of the EMI starts going directly towards reducing your principal. The result is that your loan gets finalized 2 to 3 years before the scheduled time and you are saved from paying interest worth lakhs of rupees. Understand the complete mathematics on home loan of ₹ 50 lakh: Interest of more than ₹ 7.40 lakh will be saved. Suppose a borrower has taken a home loan of ₹ 50,00,000 (fifty lakh rupees) for 20 years (240 months) at an interest rate of 9.00%. If the interest rate is reduced by 0.50% (50 bps) to the new rate of 8.50%, then the practical financial analysis of both the options would be as follows: Description Original Position (at 9.00%) Option 1: EMI reduced (at 8.50%) Option 2: Tenure reduced (old EMI kept) Loan Amount ₹50,00,000 ₹50,00,000 ₹50,00,000 Interest Rate 9.00% 8.50% 8.50% Monthly EMI ₹44,986 ₹43,391 (Reduced) ₹44,986 (Kept as is) Total Loan Tenure 240 months (20 years) 240 months (20 years) Approx 218 months (~18 years 2 months) Total Interest Payable ₹57,96,711 ₹54,13,840 ₹48,52,000 Monthly Savings — ₹1,595/month ₹0 (on monthly basis) Total Net Interest Saving Baseline ₹3,82,871 ₹9,44,711 (ie savings up to ₹7.40 lakh+) (Conclusion: Choosing option 1 (reducing EMI) results in total interest saving of only ₹3.82 lakh. While choosing option 2 (reducing tenure) results in total interest saving of ₹9.44 lakh Interest is saved—that is, an additional net savings of ₹ 5.61 lakh to ₹ 7.40 lakh is achieved directly by reducing the tenure as compared to reducing the EMI!) Financial simulation of the impact of interest rates (20 year model on a ₹ 50 lakh home loan) Must tell the bank this 'one thing': This is how to activate maximum savings RBI has clear guidelines that whenever there is a reset in floating interest rates, the bank has to refund the EMI to the customer Options for reduction, reduction in tenure or partial prepayment are mandatory. But in practice, most banks either reduce the EMI or silently increase the loan tenure without asking the customer. As soon as the rates are reduced or the reset notice is received by the bank, you should immediately send a written request to your bank/lender:
"Please do not reduce my monthly EMI amount; instead, adjust the lower interest rate benefit by reducing my loan tenure."
(Please do not reduce my monthly EMI amount, but adjust the benefit of interest rate reduction to reduce the tenure of my loan.) You can submit this request by submitting a simple application form in the 'Service Request' section of the bank's net banking, loan service portal or by visiting the branch. When is it wise to reduce EMI and when to reduce the tenure? Although financially reducing the tenure always saves the most interest, choose the right option as per your individual financial situation as follows: Reduce the tenure (Choose Tenure Reduction) if: Your monthly budget is stable and you are paying the current EMI comfortably without any pressure. Your priority is to become debt-free as soon as possible and save interest worth lakhs of rupees. There is less time left for your retirement and you want the home loan to go down to zero before the end of the service. Reduce EMI (Choose Lower EMI) If: Your household budget has recently come under pressure due to medical, children's education or other expenses. Your income is irregular or unstable and you need immediate relief from monthly cash flow. You plan to invest the saved monthly amount of ₹1,500 – ₹2,000 in a disciplined manner in a high return instrument (like a mutual fund SIP with 12-14% CAGR).