The short answer
Reduce the tenure if you can afford the current EMI. Keeping the EMI unchanged pays the loan off faster and saves more interest: on a ₹50 lakh, 20-year loan at 8.5%, a ₹5 lakh prepayment saves about ₹13.2 L this way, against ₹4.47 L by lowering the EMI. Choose a lower EMI only if monthly cash flow is the priority.
What the two choices mean
When you prepay part of a loan, the outstanding principal falls. The lender then recalculates the loan in one of two ways. It can keep your EMI the same and shorten the remaining tenure, or keep the end date the same and lower your EMI. Most banks default to reducing the tenure, but you can ask for either in writing when you make the payment.
Interest is charged every month on the balance still outstanding. The faster that balance falls, the less interest you pay. Keeping the EMI unchanged keeps the same amount going towards principal each month, which is why reducing the tenure almost always saves more.
A worked example
Take a home loan of ₹50 L at 8.5% for 20 years. The EMI is ₹43,391. At the end of year 3 the borrower prepays ₹5 L from a bonus.
| Option | EMI after prepayment | Loan ends in | Total interest | Interest saved |
|---|---|---|---|---|
| No prepayment | ₹43,391 | 20 yrs | ₹54,13,879 | – |
| Reduce tenure | ₹43,391 | 16 yrs 7 mo | ₹40,94,240 | ₹13,19,639 |
| Reduce EMI | ₹38,750 | 20 yrs | ₹49,67,021 | ₹4,46,858 |
- Reducing the tenure saves ₹8.73 L more interest than reducing the EMI on the same prepayment.
- The ₹5 L prepayment alone removes 3 yrs 5 mo of EMIs when the EMI is kept unchanged.
- Prepaying ₹1 L every year from year 2 instead saves ₹16.52 L with a shorter tenure, against ₹8.57 L with a lower EMI.
When reducing the EMI is the better choice
Saving the most interest is not always the right goal. Lowering the EMI makes sense when:
- your monthly cash flow is tight, for example after a pay cut, a new dependant or a second loan;
- you want a lower fixed commitment before a job change or a period of uncertain income;
- you plan to invest the monthly difference and are comfortable that the investment can beat your loan rate after tax.
A sensible middle path is to reduce the tenure now and keep an emergency fund of six months of expenses, including the EMI, so you are not forced to borrow again if income dips.
How to make the prepayment
- Check your loan agreement or ask the lender for any prepayment charge. RBI rules do not allow charges on floating-rate loans taken by individuals for non-business purposes.
- Pay through net banking or a cheque to the loan account, and state in writing whether you want the tenure or the EMI reduced.
- Ask for the revised repayment schedule and confirm the new EMI or end date.
- Keep the payment receipt and the updated schedule for your records and for any tax claim.
Frequently asked questions
Is it better to reduce EMI or tenure on a home loan?
Reducing the tenure saves more interest because you keep paying the same EMI on a smaller balance. Reducing the EMI is better only if you need the monthly cash flow.
Can the bank charge a penalty for prepaying a home loan?
Not on a floating-rate loan taken by an individual for a non-business purpose. Fixed-rate loans can carry a prepayment charge, so check your agreement.
When is the best time to prepay a home loan?
Earlier is better. In the first years most of each EMI is interest, so every rupee of principal repaid early saves interest for the longest time.
Can I switch from reduced EMI to reduced tenure later?
Usually yes. Most lenders let you choose with each prepayment, and some let you raise the EMI voluntarily, which has the same effect as reducing the tenure.
Should I prepay my home loan or invest the money?
Compare your loan rate with the after-tax return you can reasonably expect. Prepaying earns a guaranteed return equal to the loan rate; investing may earn more but carries risk. Many borrowers do both.