RBI Repo Rate Cut: Save on Interest by Prepaying Your Home Loan Now

The Reserve Bank of India's (RBI) recent repo rate cuts have led to lower interest rates on home loans. While this is good news for borrowers, it's crucial to consider the total interest paid over the loan's lifetime. Prepaying your home loan, especially long-term loans with high interest rates, can provide a better return than many fixed-income investments after taxes.

Focus on Total Interest, Not Just EMI

While lower monthly installments (EMIs) are appealing, borrowers should remember that the true cost of a loan is the total interest paid, which increases with longer loan terms. The RBI has reduced the repo rate by a cumulative 125 basis points in 2025 through four cuts, and banks are now passing on these benefits to customers. Lending rates linked to external benchmarks and the repo rate have decreased, making loans more affordable for both new and existing borrowers.

Prepayment vs. Investment: A Smart Choice

Even with the recent rate cuts, most home loans still carry interest rates around 7.9-8.2%. This is notably higher than what most fixed deposits or small savings schemes offer after taxes, leading to a situation of negative arbitrage where borrowers pay more on their loans than they earn on their investments.

Therefore, prepaying high-cost, long-term loans is a smart move, especially if you have surplus funds. Prepaying isn't just about becoming debt-free; it's a sound financial decision. Each rupee used to reduce the outstanding loan balance saves you future interest payments at the loan's interest rate. In effect, prepayment offers a guaranteed, risk-free return equal to the loan interest rate, which is currently around 8%.

This return is difficult to match with other fixed-income investments after considering taxes. For example, a fixed deposit yielding 6.5% before tax might only translate to 4.5-4.8% after tax for someone in a higher tax bracket. Prepaying your home loan provides a superior, volatility-free outcome without reinvestment risk. The argument for prepayment is even stronger under the new income tax regime, where interest paid on self-occupied home loans is not eligible for deductions.

Why Early Prepayment Matters

In the initial years of a long-term loan, a significant portion of your EMI goes towards interest payments. This means you're paying heavily upfront while only slowly reducing the principal balance. By prepaying early in the loan cycle, you tackle the most expensive part of the interest component, shortening the loan tenure and significantly reducing the total interest paid.

Some borrowers hesitate to prepay, preferring liquidity or believing they can earn more by investing elsewhere. That said, the reality is a bit more complicated. this often doesn't hold true for fixed-income investments, especially after taxes. Address liquidity concerns by maintaining an emergency fund, and then use surplus funds to reduce your loan.

Debt should be a tool, not a lifelong burden. If your loan's interest rate exceeds what you can safely earn elsewhere, holding onto long-term debt becomes a drag on your financial well-being. Prepaying high-cost loans early is a simple and effective way to improve your long-term financial health.

Impact of Prepayment on Loan Tenure

Here's an example of how a Rs 2 lakh prepayment can affect the tenure of a Rs 50 lakh loan at 8%:

• Remaining tenure 5 years:** New tenure after prepayment: 4 years 6 months (Savings: 6 EMIs)
• Remaining tenure 10 years:** New tenure after prepayment: 9 years 2 months (Savings: 10 EMIs)
• Remaining tenure 15 years:** New tenure after prepayment: 13 years 8 months (Savings: 16 EMIs)