Prepaying a home loan: reduce EMI or tenure?
Prepay ₹5 lakh in year 3 of a ₹50 lakh loan: cutting tenure saves ₹13.2 lakh of interest, cutting the EMI ₹4.5 lakh. See why, and when the EMI cut wins.
6 min read
You've prepaid ₹5 L on your home loan, and the bank asks: reduce the EMI, or reduce the tenure?
Take a ₹50 L loan at 8.5% over 20 years, with an EMI of ₹43,391. Prepay ₹5 L at the end of year 3:
Why cutting tenure saves more
Both choices put the same ₹5 L against the principal. The difference is what happens to your EMI afterwards.
- Keep the EMI: each payment now covers less interest, so more of it repays principal. The balance falls faster every month, and the loan closes early.
- Cut the EMI: the bank recalculates the EMI to finish on the original date. You pay less each month, but the loan runs for the full 20 years and keeps charging interest the whole time.
Figure 1 from the Prepayment calculator
Loan left each year after a ₹5 L prepayment
How to read it
- 1The ₹5 L lands at the end of year 3, and both lines drop by the same amount.
- 2Keeping the EMI at ₹43,391 closes the loan after 16.6 years. Cutting it to ₹38,750 runs the full 20.
How much interest does a prepayment save?
| Prepay | Saved: cut tenure | Loan ends sooner | Saved: cut EMI | New EMI |
|---|---|---|---|---|
| ₹2 L | ₹5.9 L | 18 months | ₹1.8 L | ₹41,535 |
| ₹5 L | ₹13.2 L | 41 months | ₹4.5 L | ₹38,750 |
| ₹10 L | ₹22.2 L | 74 months | ₹8.9 L | ₹34,108 |
Cutting tenure turns ₹5 L into ₹13.2 L of interest saved: over 2.5 rupees for every rupee prepaid, and risk-free.
Prepay early if you can
Early in a loan most of each EMI is interest, so principal you repay then saves interest for the most years.
Figure 2 from the Prepayment calculator
Interest the same ₹5 L saves, by the year you prepay
How to read it
- 1Prepaying in year 1 saves ₹16 L. By year 15 the same amount saves ₹2.2 L.
Enter your loan, the prepayment and the year, then switch between keeping the EMI and keeping the tenure.
When reducing the EMI makes sense
- Cash flow is tight, or a lower fixed cost would help you sleep: a single income, a new baby, a job change.
- You'll invest the difference. Putting the ₹4,641 a month you free up into a SIP can beat the interest saved, if you actually do it and the SIP earns more than the loan costs after tax.
- Best of both: take the lower EMI but keep paying the old amount as extra principal while you can. You keep the saving and the option to fall back to the lower EMI.
Whether to prepay at all, rather than invest, is a separate question: prepay your home loan or invest in a SIP?
Before you prepay
- Check for charges. RBI rules bar lenders from charging individuals for prepaying floating-rate loans taken for non-business purposes.[1] Fixed-rate loans can still carry a charge.
- Keep your emergency fund. Money paid into a loan is hard to get back. Fill the emergency fund first.
- Old tax regime? Interest on a self-occupied home earns a deduction of up to ₹2 lakh a year under section 24(b), which makes the loan a little cheaper to keep.
EMIs paid monthly; the prepayment lands at the end of the loan year; rate unchanged throughout. For illustration only, not financial advice.
Sources
- [1]RBI directs lenders not to levy pre-payment charges on floating-rate loans to individuals (opens in a new tab)PTI, via The Week · 2 Jul 2025