AKG Money

Prepay the home loan or invest?

A bonus lands. Pay down the home loan, or invest it? See how much interest prepaying saves, whether to cut the tenure or the EMI, and which choice leaves you better off.

These are example numbers. Change any of them to see your own answer.

Your home loan
₹

= ₹50 L

%
years
The money you have

A bonus, a maturing FD, an inheritance.

₹

= ₹5 L

Equity funds over long periods; not guaranteed. Prepaying 'earns' your loan rate, guaranteed.

%
%
Invest it

By the loan's original end date, investing the ₹5 L leaves you about ₹6.25 L better off after tax. That assumes a 11% return, which isn't guaranteed; prepaying is a sure 8.5%.

Prepay, keep the EMI
3 years 7 months sooner
Saves ₹14,69,086 of interest
Prepay, cut the EMI
₹4,527 less a month
New EMI ₹40,746; saves ₹4,77,894 of interest
What you'd have in 18 years, after tax
ItemPrepay, then invest the EMIInvest the lump sumBetter off
EMI you pay₹45,273 until done₹45,273 throughout
Wealth at the end₹23 L₹29.25 L
RiskNone on the savingMarket ups and downs
Better choiceInvest it

How this is worked out

  1. Prepay and keep the EMI: the loan finishes sooner; the interest saved is the difference in total interest.
  2. Prepay and cut the EMI: the tenure stays; the EMI falls in proportion to the loan.
  3. Fair comparison at the loan's original end date. Prepay: after the loan finishes early, the EMI you no longer pay is invested every month. Invest: the lump sum is invested now and you keep paying the original EMI.
  4. Investment gains are taxed when sold at the rate you set. Prepaying is like earning your loan rate, guaranteed and tax-free.

Questions people ask

Is there a penalty for prepaying a home loan?

Not on floating-rate home loans taken by individuals: banks can't charge prepayment penalties on them. Fixed-rate loans may carry a charge; check your loan agreement.

Reduce the EMI or the tenure?

Reducing the tenure saves far more interest. Reduce the EMI only if your monthly budget is tight.

What about the tax benefit on home-loan interest?

Under the old regime, up to ₹2 lakh of interest a year is deductible for a home you live in. If your interest is well above that, prepaying doesn't reduce the benefit. The new regime has no such deduction.

What's the sensible middle path?

Keep your emergency fund full first. Then many people split: part to prepay for the guaranteed saving and peace of mind, part invested for growth.

Is my data saved anywhere?

No. Everything is worked out in your browser. Your numbers stay on your own device, and the page link holds them so you can share them.

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