Reduce Home Loan EMI or Reduce Tenure?

Written by Gagandeep Arora || Printed on - Date - 06 November 2024

Reduce Home Loan EMI or Reduce Tenure? Which Option Saves You More?

When it comes to managing your home loan, one of the biggest decisions you’ll face is whether to reduce your EMI (Equated Monthly Instalment) or shorten the loan tenure. If you have a home loan of ₹75 lakh with a 25-year tenure, you might be wondering which option will help you save more money: reducing your EMI for lower monthly payments or reducing your loan tenure to pay off the loan faster. Let’s break down both options and help you make the best decision.

Option 1: Reduce EMI by Extending the Loan Tenure

One way to reduce your monthly EMI is by extending the loan tenure. This means that while you pay lower EMIs, your loan repayment period becomes longer.

Pros of Reducing EMI by Extending the Tenure:

• Lower EMI: The biggest advantage is that your EMI amount will decrease, making it easier to manage your monthly payments. This can provide immediate relief to your monthly cash flow.
• Immediate Relief: If you're facing financial difficulties or if you're budgeting for other expenses, a lower EMI can be a quick solution.

Cons of Extending the Tenure:

• Higher Total Interest Paid: Although your monthly EMI reduces, the total interest paid over the life of the loan increases. This is because you’re paying off the loan over a longer period, and interest accumulates over time.
• Longer Loan Duration: Extending the loan term means that you'll be in debt for a longer period, and it could delay achieving your financial goals like investing or saving for retirement.

Option 2: Reduce the Loan Tenure to Save on Interest

The second option is to reduce the loan tenure. While this may result in a higher EMI, it helps you save money in the long term by reducing the total interest burden and allowing you to pay off the loan sooner.

Pros of Reducing the Loan Tenure:

• Significant Interest Savings: By reducing your loan tenure (for example, from 25 years to 20 years), you will pay off the loan quicker. The faster you repay the principal, the less interest you will pay overall. In fact, shortening your tenure can save you lakhs in interest payments.
• Faster Loan Closure: Paying off the loan earlier means you’ll be debt-free sooner, which can help you achieve other financial milestones faster.
• Lower Total Loan Cost: Over time, reducing the loan tenure reduces the total cost of borrowing, as interest costs are minimized.

Cons of Reducing the Tenure:

• Higher EMI: The major downside is that your monthly EMI will increase. This could put a strain on your monthly budget, especially if your income is not flexible enough to handle the increased payment.
• Potential Budgeting Challenges: Higher EMIs might require better financial planning to ensure that you don’t end up stretching your finances too thin.

Real-World Example: ₹75 Lakh Home Loan

Let’s consider an example of a ₹75 lakh home loan with an 8% interest rate over a 25-year tenure:

Scenario 1: Extending the Tenure (Reducing EMI)

If you extend the loan tenure from 25 years to 30 years, your EMI will reduce by around ₹5,000–₹10,000. However, the total interest you’ll pay over 30 years could increase by ₹20–₹30 lakh, meaning you’ll be paying significantly more in the long term.

Scenario 2: Reducing the Tenure (Increasing EMI)

If you reduce the loan tenure from 25 years to 20 years, your EMI will increase by ₹5,000–₹10,000. However, you will save up to ₹25 lakh in interest payments and shorten your loan term by 5–6 years. The total interest savings far outweigh the short-term increase in your EMI.

Which Option Should You Choose?

Your decision depends on your current financial situation and long-term goals:

1. If You Need Lower Monthly Payments: If immediate relief from high monthly payments is your primary concern, extending the loan tenure may be the better option. This reduces your EMI and eases your monthly burden. However, it comes with the downside of paying more interest over time.
2. If You Want to Save on Interest and Pay Off Your Loan Faster: If you can afford the higher EMI, reducing the tenure is the smarter choice. Although your EMI will increase, you’ll save significantly on interest and be debt-free much sooner.

Conclusion: Which Option Saves You More?

If you’re focused on saving money in the long run and reducing your overall debt, reducing your loan tenure is the best option. You can save up to ₹25 lakh in interest and shorten your loan by 64 months (around 5–6 years). While your EMI will rise, the long-term savings are substantial.

However, if managing cash flow is more important in the short term and you need immediate financial relief, reducing your EMI by extending the loan tenure may be a good choice. Just keep in mind that this option increases your total repayment amount due to higher interest costs.

Pro Tip: Before making any decision, consult with your lender or a financial advisor to get a clearer picture of how each option will impact your finances, and choose the one that aligns best with your financial goals.