Increase your EMI by Rs 5,000 to save more than Rs 26 Lakh in home loan interest

Starting April 2025, expect more cash flow due to the significant income tax cuts announced by Finance Minister Nirmala Sitharaman in the Union Budget for 2025-26, complemented by potential salary increments and performance bonuses.

This is an opportune moment to strategize financially-by reducing liabilities and increasing investments. Vipul Patel, Founder of Mortgageworld.in, underscores the importance of reducing the interest burden for home loan borrowers, as even slight adjustments can yield significant savings.

The Reserve Bank of India's (RBI) recent 25 basis point cut in the repo rate on February 7 presents an opportunity for home loan borrowers to benefit from reduced interest rates.

While it's tempting to opt for lower EMIs, maintaining the current installment amounts can significantly reduce the tenure instead. As explained by Adhil Shetty, CEO of BankBazaar.com, retaining the EMI with a decreased interest rate- such as a reduction from 8.5% to 8.25%—could save Rs 8,114 per lakh on a loan compared to only Rs 3,472 by lowering the EMI. This benefits borrowers through a 133% higher saving via tenure adjustment versus EMI reduction.

It's also advisable to proactively increase EMIs. Borrowers have the flexibility to choose higher EMIs, extend loan tenure, or adopt a combination when rates increase, as mandated by the RBI. In a declining rate environment, increasing EMIs or making part-prepayments can be financially beneficial.

Patel suggests that a borrower could increase their EMI by Rs 5,000, which would reduce a 25-year loan tenure to just over 17 years, assuming a Rs 50 lakh loan at an interest rate reduced from 8.5% to 8.25% post-repo reduction. Furthermore, the new tax regime can save individuals with a Rs 25 lakh gross salary approximately Rs 1.14 lakh annually—savings that could be directed towards an EMI increase for faster debt elimination.

Moreover, the annual bonus season in April aligns with these strategic financial moves. Using yearly bonuses for part-prepayments can effectively reduce the principal amount and the tenure by five additional months, as Patel outlines. Combining an EMI increase with a one-time Rs 50,000 prepayment could result in paying off the home loan with 97 fewer EMIs.

Strategically employing part-prepayments systematically rather than sporadically is crucial. Establishing a targeted timeline for debt repayment is beneficial. Shetty advises aiming to repay 10% of the loan balance annually through EMIs and prepayments, using an updated amortization schedule to guide this financial plan.