By Adhil Shetty
The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points, the second time this year. For borrowers, particularly those with floating-rate home loans, this means not just lower EMIs but also a moment to rethink their repayment strategy and potentially close their loan faster, especially if they’re sitting on surplus funds.
In a softer rate environment, it becomes easier to make partial prepayments without disrupting your monthly budget. Even modest top-ups to your EMI or periodic lump sum payments can shorten your loan tenure significantly. For those with cash reserves, this could be a strategic moment to reduce long-term interest costs while preserving tax benefits.
Lower EMIs free up capital
When interest rates drop, the immediate benefit is a reduced EMI on floating-rate loans. Instead of pocketing the savings, consider maintaining your original EMI amount. The extra portion now goes directly towards the principal, not interest. This can cut down your loan tenure by several months or even years.
For instance, maintaining a Rs 35,000 EMI after your revised EMI drops to Rs 33,000 means an extra Rs 2,000 per month is going toward the principal. Over time, the cumulative impact is significant. You’re paying faster and smarter.
Floating-rate loans
One of the most borrower-friendly features of floating-rate home loans is the zero-prepayment penalty. That gives you the freedom to make part-prepayments anytime — without incurring additional charges.
Whether it’s a yearly bonus, maturity proceeds from a fixed deposit, or even monthly surplus, using these inflows to prepay your loan is a financially sound move. Even two or three small prepayments a year can substantially lower your interest outgo.
Consider refinancing
If your existing lender hasn’t passed on the full benefit of the rate cut, consider refinancing. But this involves costs such as processing fee of 0.25%-1% of loan amount, legal and technical charges of Rs 5,000-15,000, administrative fees between Rs 1,000-5,000. This is where negotiation comes in. Ask the new lender to waive or reduce charges – many do so for high-credit-score borrowers. Alternatively, check if your existing lender is willing to match the competitor’s rate to retain you.
Tax benefits
An early loan closure shouldn’t mean you miss out on tax benefits. Under Sections 80C and 24(b) of the Income Tax Act, you can claim deductions of up to Rs 1.5 lakh on principal and Rs 2 lakh on interest annually. To maintain these benefits while accelerating repayment, spread out your prepayments across financial years to lower the loan burden while still maximising your tax deductions.
Save & act strategically
A falling interest rate cycle is more than just a breather for your monthly budget. It’s an opportunity to optimise your home loan repayment strategy. In short, don’t let a falling EMI be the end of the story.
The writer is CEO, Bankbazaar.com
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