Home Loan Prepayment in India: Reduce Tenure or EMI?

Note: This content is specific to the Indian banking system.

In India, home loan interest rates are relatively high (8.5% - 9.5%). Over a 20-year tenure, you often end up paying the bank more in interest than the principal amount you borrowed.

The most effective way to fight this is Prepayment. But when you make a part-payment, the bank asks: "Do you want to reduce the EMI or the Tenure?"

The Golden Rule: Always Reduce Tenure

Let's look at the math for a ₹50 Lakh loan at 9% for 20 years.

• Total Interest Payable: ₹58 Lakhs.

If you prepay ₹1 Lakh:

1. Reduce EMI: Your monthly burden drops slightly (by ~₹900), but your interest savings are modest (~₹1.5 Lakhs).
2. Reduce Tenure: Your EMI stays the same, but your loan finishes months earlier. Interest savings: ~₹4.5 Lakhs.

Reducing Tenure is 3x more effective at saving money than reducing EMI.

The 5% Strategy

A simple, powerful habit for Indian borrowers is to prepay 5% of the outstanding balance every year (using annual bonuses or savings).

• Doing this consistently can clear a 20-year loan in just 10 to 12 years.
• Ensure your loan is on a Floating Rate so there are no prepayment penalties (per RBI rules).

Conclusion

Treat your home loan as an emergency to be cleared, not a monthly rental. Choose "Reduce Tenure" every single time.

👉 India Home Loan Prepayment Calculator