RBI Repo Rate Cut & Home Loan Prepayment: How Borrowers Can Save Big

This article explains why prepaying your home loan could save you a substantial amount of interest now that the Reserve Bank of India (RBI) has cut the repo rate multiple times in 2025, most recently by 25 basis points in December, bringing the cumulative cuts this year to 125 bps. 

We examine how repo-linked lending rates are dropping, why prepayment may benefit long-tenure borrowers, and how much you can potentially save.

Lower Repo Rate Means Borrowing Cost Relief

The repo rate — the rate at which the RBI lends to commercial banks, is a key driver of borrowing costs in India. Each time the RBI cuts this rate, banks often lower their lending rates, especially those linked to external benchmarks like the RBI’s policy rate. This makes home loans, which are typically long-term and costly, more affordable for both new takers and existing borrowers choosing floating-rate loans.

However, while lower interest rates reduce monthly EMIs, many borrowers overlook the total interest payable over the loan’s tenure. Because long-term home loans (often 15–20 years) are structured so that early EMIs comprise mostly interest cost, borrowers paying interest over many years end up paying far more than the principal. 

Thus, in a falling-rate environment, prepaying part of your loan principal early can dramatically reduce the overall interest burden and shorten your tenure.

Transition hook: With the recent 25-basis-point cut and banks passing on lower rates, now is arguably one of the best times in recent memory to revisit your prepayment strategy, if done strategically.

1. Why the RBI Repo Rate Cuts Matter for Your Home Loan

The RBI’s repo rate decisions directly impact the cost of borrowing. When the Central Bank lowers the repo rate:

• Banks can borrow funds from the RBI at a lower cost.
• This often leads to lenders lowering their lending rates, particularly for loans linked to the external benchmark or repo rate.
• Home loan borrowers can then see lower EMIs or the option to maintain the same EMI but shorten loan tenure.

In 2025, the RBI reduced the repo rate several times: cumulatively 125 basis points (1.25 percentage points). This has provided a tailwind for borrowers, encouraging them to either reduce EMIs or prepay principal.

Financial experts argue that the real advantage of a rate cut comes not just from temporarily reduced EMIs, but from opportunities to reduce the total interest paid over the life of the loan.

Repo Rate Cuts and Typical Home Loan Rate Transmission

Here’s a simple look at how repo rate cuts gradually influence your home loan costs:
 

Summary: The drop in repo rates encourages lenders to reduce home loan interest rates, which helps both new buyers and existing borrowers seeking to save on interest.

Why Prepaying Your Home Loan Can Be More Profitable Than Most Investments

When considering loan prepayment, the key is comparing the interest you save with returns you get from alternative investments. In the current environment:

• Many savings instruments like fixed deposits (FDs) and small savings schemes offer returns around 6–7% before tax.
• Post-tax, returns for many borrowers (especially in higher tax brackets) fall even lower.
• In contrast, the effective return from prepaying a home loan is equivalent to the interest rate on that loan, typically around 8% or more.

This creates a strong case for prepayment: the guaranteed “return” you get by reducing future interest often exceeds what you’d earn in many savings or debt investments (which carry reinvestment risk and lower post-tax returns).

For example:

• An early prepayment of ₹2 lakh on an ongoing 20-year loan could cut several years off your tenure and save many EMIs’ worth of interest.
• Borrowers in the highest tax bracket effectively earn less on FDs after tax, strengthening the logic for loan prepayment.

This makes prepayment, when done wisely, a financially sound choice — provided you maintain adequate emergency savings.

3. Table: Prepayment Impact Across Loan Tenures

Before deciding on prepayment, it helps to see how early principal repayment affects your loan’s lifetime cost. Here’s an illustrative example based on typical home loan parameters and RBI’s rate cuts:

This table shows how prepayments affect remaining tenure and interest cost, assuming interest rates adjust downward with repo cuts.
 

Summary: Making a lump-sum prepayment early in the loan cycle cuts future interest dramatically, because those early years are when more of your EMI is interest portion, not principal.

4. When Should You Prepay vs. Maintain Liquidity?

Prepayment is not always the optimal choice for everyone. Borrowers should consider:

• Emergency funds: Before prepaying aggressively, ensure you have at least 6–12 months of living expenses in liquid savings.
• Other higher-interest debts: If you have other loans like credit card debt or personal loans at higher rates, paying those off first is generally smarter.
• Investment alternatives: In some cases, if you’re confident of higher risk-adjusted returns in equities or retirement instruments, you might choose not to prepay all at once.

Thus, while prepayment offers a risk-free “return” in the current rate environment, it should fit into your overall financial planning strategy.

Conclusion

India’s latest round of repo rate cuts has made home loan borrowing cheaper, with banks beginning to reduce lending rates in response. While this generally lowers EMIs and loan costs, prepaying your home loan now, especially if you have surplus funds — can be a powerful way to reduce total interest outgo and shorten loan tenure, often outperforming many traditional savings returns after tax.

However, this is not a one-size-fits-all prescription. Borrowers must balance prepayment against emergency cushions and other financial goals. Yet for those prioritising debt freedom and seeking guaranteed savings, strategic prepayment in a falling-rate environment makes strong financial sense.
 

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About the Author

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.