« How much Long-Term Wealth has been Built with Equity Investing in the US Stock Market? What is the biggest benefit of holding mutual fund units in demat form? »

Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?

Posted on 29 Oct 2023
Author: Sayan Sircar

Tags: Loans ; House Purchase

10 mins read
📢Join 3,900+ readers on WhatsApp and get new post notifications!

Home loan rate hike? You can prepay to keep EMI and tenor same. This post shows how.

Home Loan Rate Hiked? How Much Prepayment should you make to Keep EMI and Tenor Same?

This article is a part of our detailed article series on the concept of home loans. Ensure you have read the other parts here:

How can you pay the least interest and get the most tax deduction on your home loan?

This article breaks down the benefits of prepaying your home loan and how it impacts both your interest payments and tax savings.

How much time and interest do you save if you pay off your home loan using a step-up EMI?

This article shows how quickly you can pay off your home loan, and even save a lot of interest, by increasing your EMI steadily year-on-year.

Home loan tax benefits that you get when you buy a property jointly with your spouse

This article tells you why it is a good idea to buy a home jointly as a couple and it is not only the tax benefits you get.

Home Loan Eligibility for Joint Applicants: how to buy a bigger house

This article shows you an easy way to calculate how big a house you can buy based on your family’s combined monthly salary.

How paying a small fee to your bank can save you lakhs in home-loan interest?

This article shows how paying a small fee to your bank to reduce your home loan rate can save you lakhs in interest over the life of your loan.

What benefit do you get if you make a one-time prepayment to your home loan?

This article shows you the benefits due to interest saving when you make a part-payment to your home loan. Your loan duration also reduces due to the pre-payment.

How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Should you prepay your home loan at the beginning or at the end of the tenure?

This article helps you decide when to prepay your home loan - at the beginning, middle or end of the total loan period.

How does an overdraft loan like SBI Maxgain work?

This articles describes overdraft home loans like SBI Maxgain and BOB Home Loan Advantage.

What should you do when your home loan interest rates go up?

This post discusses managing when interest rates go up increasing your home loan EMI.

📚 Table of Contents

How a home loan works?
One worked out example
How much home loan should you prepay to keep your EMI and tenor constant?
What if the desired reduction is more than 1%?

How a home loan works?

Mortgage payment vs home equity

The bank gives a home loan to own the property while you use it until you pay back the loan via EMIs. An Equated Monthly Instalment plan (EMI) is a standard way to pay off a loan by making a fixed payment monthly that includes both interest and principal in the same amount.

EMI = Principal + Interest

In each EMI, the split of the interest and principal changes since the interest is based on the outstanding loan balance at that point and the rest of the EMI is principal. As the chart shows, the interest part drops off with time, and the rest is the principal. The actual numbers in the chart relate to a ₹50 lakhs home loan taken at 8% for 25 years. The EMI is ₹38,591. The down payment amount is ₹12.5 lakhs.

You can test the numbers using this calculator:

As you pay back the loan, your ownership share in the house will increase in the same way. At the point of taking the loan, you own 20% of the house (12.5 out of 62.5, of which 50 is the loan). The bank owns 80%. As the loan is repaid, you own more and more of the house as the principal is paid off. This is the concept of building equity in an asset. Equity is the part of the asset you own after subtracting the part that the bank owns.

Home equity value = Current home value - Outstanding loan balance

Once you build equity in your home, that has additional benefits:

You can take a top-up loan in case you need money for some other purpose like home improvement or any other reason.
The more you will get to keep if you sell the house.

We break down the home loan rate into its major components to see where the fluctuations come from.

Repo linked home loan rate = Repo Rate + Spread + Premium

Repo rate: This rate is decided by the RBI. Home loan rates will move up and down as soon as the RBI revises the repo rate.

The latest repo rate is 6%. This rate was last reviewed by the RBI on 09 Apr 2025.

Spread: This is an additional rate on top of the repo rate that essentially captures the profit the bank can make off this loan relative to the deposits it offers to customers. This rate is generally revised every three years but will vary from bank to bank.

Premium: An extra value for some specific customers. For example, SBI adds another 15 bps for non-salaried customers or it will depend on the CIBIL score of the borrower. This value is also revised periodically, like every three years.

This article shows you what to do if you wish to prepay your home loan so that your EMI and loan tenure remains same after a recent interest rate hike.

👉 Join our free WhatsApp community for the latest updates.

One worked out example

If you are using Excel to calculate your home loan EMI, the formula to use is:

EMI = PMT(rate/12,time * 12,-principal,0,0)) where time = years left to pay the loan

Loan balance = PV(Rate / 12, time * 12,-EMI)

Metric	Value
Loan balance (₹ lakhs)	50
Rate of interest	8.0%
Projected increase	1.50%
New rate of interest	9.5%
EMI	47,783
Years left	15
Prepaid amount (₹ lakhs)	4.24
New loan balance (₹ lakhs)	45.76
Prepayment %	8.482%

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Start Building Wealth with Expertly Curated Mutual Fund Packages

🔹 Retirement Packages — Start with just ₹52,377/month
🔹 FIRE Packages — Achieve Financial Freedom from ₹86,277/month
🔹 College Fund Packages — Secure Education from just ₹10,554/month

How much home loan should you prepay to keep your EMI and tenor constant?

We will now show some calculations based on the amount of interest rate change applicable to you.

Percentage Home Loan Outstanding Balance to be prepaid to reduce interest rate by 0.25%

Percentage Home Loan Outstanding Balance to be prepaid to reduce interest rate by 0.5%

Percentage Home Loan Outstanding Balance to be prepaid to reduce interest rate by 0.75%

Percentage Home Loan Outstanding Balance to be prepaid to reduce interest rate by 1%

What if the desired reduction is more than 1%?

We can chain the payments. If you wish to reduce your interest rate by 1.5% say, you need the values from the 1% and 0.5% table and calculate the total reduction like this:

Loan balance: ₹40 lakhs
Loan duration: 15 years
Rate: 8%
Prepayment for 1% reduction: 5.78% i.e. 40 * 5.78% = ₹2.312 lakhs, balance left ₹37.688 lakhs
Prepayment for 0.5% reduction: 2.95% i.e. ₹37.688 * 2.95% = ₹1.112 lakhs
Total prepayment = ₹2.312 lakhs + ₹1.112 lakhs

The general rule is:

Total prepayment = Principal * (1- PPT_1 %) * (PPT_2 %) for two prepayments

Total prepayment = Principal * (1- PPT_1 %) * (1- PPT_2 %) * (PPT_3 %) for three prepayments etc

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

For resident Indians 🇮🇳:

For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Check out our two calculators: Arthgyaan step-up SIP calculator
Arthgyaan step-up SWP calculator

Latest articles:

Article: This article explains the rules for dealing with NRO, NRE, FCNR and RFC accounts for an NRI returning to India from both FEMA and Income Tax perspective.

NRI Return to India

Returning to India? What to do with your NRE and NRO accounts and by when? Article: This article explains the rules for dealing with NRO, NRE, FCNR and RFC accounts for an NRI returning to India from both FEMA and Income Tax perspective.

Published: 27 April 2025

1 MIN READ

Article: This guide provides country-specific rules for NRIs transferring money to India regarding tax in their home country and reporting.

NRI Tax

NRI Money Transfers to India: What are the Taxation and Reporting Rules in the Foreign Country? Article: This guide provides country-specific rules for NRIs transferring money to India regarding tax in their home country and reporting.

Published: 25 April 2025

5 MIN READ

Topics you will like:

Asset Allocation (19) Basics (8) Behaviour (20) Budget (24) Budgeting (12) Calculator (36) Case Study (7) Children (22) Choosing Investments (40) FAQ (20) FIRE (19) Fixed Deposit (10) Free Planning Tool (16) Gold (29) Health Insurance (8) House Purchase (43) Index Funds (1) Insurance (20) International Investing (16) Life Stages (2) Loans (27) Market Data (10) Market Movements (28) Mutual Funds (85) NPS (17) NRI (41) News (38) Pension (11) Portfolio Construction (61) Portfolio Review (32) Reader Questions (8) Real Estate (16) Research (6) Retirement (44) Return to India (7) Review (27) Risk (8) Safe Withdrawal Rate (6) Screener (8) Senior Citizens (5) Set Goals (28) Step by step (15) Stock Investing (5) Tax (103)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.

Arthgyaan

Supporting everyone's personal finance journey