After RBI Repo Rate Cut, Home Loan Prepayment May Save More Than Lower EMIs

Banks have begun passing on lower rates after the latest RBI move, easing EMIs for borrowers. But financial experts say the biggest savings now lie in cutting loan tenure through prepayment.

The RBI repo rate cut of 25 basis points on 6 December 2025 prompted banks to lower home loan rates, pushing experts to urge borrowers to prepay loans to slash lifetime interest costs.

The Reserve Bank of India’s Monetary Policy Committee reduced the repo rate for the fourth time in 2025, taking the cumulative reduction this year to 125 basis points. The decision was announced in the MPC Resolution dated 6 December 2025, available on RBI.org.in → Monetary Policy → MPC Resolutions. 

While EMIs have fallen marginally, experts stress that borrowers should focus on reducing total interest outgo rather than enjoying short-term relief.

Why Prepayment is Essential Than EMI Relief After Rate Cuts?

Even after the latest RBI repo rate cut, most floating-rate home loans are still priced between 7.9 percent and 8.2 percent. This remains significantly higher than returns from fixed deposits and small savings schemes, especially after tax.

Financial planners highlight a clear case of negative arbitrage. Borrowers often earn 6.5 percent or less on fixed deposits, which translates to around 4.5–4.8 percent post tax for those in higher tax brackets. In contrast, prepaying a home loan delivers a guaranteed, risk-free return equal to the loan interest rate, close to 8 percent today.
 

This makes prepayment financially superior for borrowers with surplus funds after the RBI repo rate cut.

How Early Prepayment Cuts Loan Tenure and Interest Sharply?

Home loans are structured so that interest forms a major part of the EMI in the early years. Principal repayment is slow initially, which means borrowers pay the costliest interest upfront. Prepaying early directly reduces the outstanding principal, shrinking both tenure and total interest.
 

Experts say repeated small prepayments during the first half of the loan tenure can reduce interest outgo by several lakhs over time.

Why the New Tax Regime Strengthens the Case for Prepayment?

The logic of carrying a long-tenure loan has weakened further under the new income tax regime. Interest paid on a self-occupied home loan no longer qualifies for deduction under this regime, eliminating the tax shield that earlier softened borrowing costs.

Without tax benefits, holding a loan purely for liquidity or investment reasons becomes less attractive, especially when interest rates still exceed safe investment returns. Financial advisors recommend maintaining an emergency fund separately and using surplus funds for loan reduction.

A related personal finance explainer from LoansJagat highlights how reducing high-cost debt improves long-term financial health:

RBI’s Broader Policy Signal and Past Rate Cuts

The RBI has stated that rate cuts aim to support growth while keeping inflation in check. The December 2025 MPC Resolution cited easing inflation pressures and the need to strengthen credit transmission.

In its Financial Stability Report, June 2025 (Serial No. FSR-2025-06), available on RBI.org.in → Publications → Financial Stability Report, the central bank also cautioned against prolonged high household leverage, especially from long-tenure loans.
 

Financial planners say EMI relief should not lead to complacency. Bank officials note that most floating-rate home loans do not attract prepayment penalties, making early repayment easier. Experts advise borrowers to channel EMI savings or surplus income into part-prepayments rather than low-yield investments.

Conclusion

After the RBI repo rate cut, lower EMIs offer comfort, but home loan prepayment delivers the biggest savings. Reducing principal early remains one of the most effective ways to cut long-term interest and build wealth.

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LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.