Lighten your debt burden before the festive season: Should you increase your home loan EMI or the loan tenure? Find out..

Last year, around Diwali, Prashant and Renu from Gorakhpur moved into a new home, having taken a loan of ₹50 lakh at an 8% interest rate. With a small family and modest expenses, they were managing their home loan EMIs with ease. This Diwali, as they were preparing to welcome a new member into their family, the Reserve Bank of India (RBI) raised the repo rate for the first time in four years. Prashant’s bank immediately sent a notification—a message that left him anxious—as both the home loan interest rate and the EMI burden had increased.

The question now was: how could they manage their budget amidst rising inflation?
This is not just Prashant’s problem; it is a challenge faced by millions of others.
RBI data indicates that 68.2% of floating-rate loans are linked to an external benchmark—the repo rate. Consequently, a 0.25% hike in the repo rate has a direct impact on the pockets of home loan borrowers.

In such a situation, the primary dilemma is: should one increase the EMI amount or extend the loan tenure?
When interest rates rise, banks typically offer two options: either increase your monthly EMI amount or extend the total tenure of the loan.

If you choose to keep your EMI unchanged and extend the loan tenure, you might feel some immediate relief; however, in the long run, you will end up paying lakhs of rupees more in interest to the bank.
If your finances allow, it is always a wiser decision to increase the EMI amount rather than extending the tenure, as this helps you avoid the trap of paying a massive amount in interest.

There are other ways to mitigate the burden of increased EMIs and interest costs:
Partial Prepayment: Whenever you have surplus cash or receive a windfall (such as a tax refund or a maturity payout), consider using a portion of it to make a partial prepayment on your loan. After making a prepayment, opt to reduce the loan tenure rather than lowering your EMI.

Consider the example of Prashant. If Prashant makes a lump-sum prepayment of ₹1 lakh, he can reduce his total interest cost over the repayment period by approximately ₹3.51 lakh.

Increase your EMI as your income grows: If making lump-sum prepayments is difficult, you might consider voluntarily increasing your EMI. Even a modest increase—say, by ₹2,000 or ₹5,000—can significantly lighten your interest burden.

For instance, if the repo rate rises and you decide to voluntarily increase the EMI on your ₹50 lakh, 20-year home loan by ₹5,000, you would not only reduce your total interest payable by about ₹12 lakh, but also shorten your loan tenure to approximately 16 years.

Pay one extra EMI every year: If you use an annual bonus or incentive to pay one additional EMI each year, it accelerates the reduction of the principal amount in the early years, leading to substantial interest savings over the long term.

Negotiate with your bank: Your home loan interest rate comprises the repo rate, operating costs, and a credit risk premium. Operating costs are reviewed and can be reset every three years. Furthermore, if your credit score improves, you can request your bank to lower your interest rate.

For example, if your credit score improves from 750 to over 800 after taking out a home loan in 2025, you may be able to get your interest rate reduced. If your bank does not agree, you always have the option to switch to another lender.

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