Should I prepay my home loan or invest?
Prepay your home loan if the return you expect from investing, after tax, is lower than your loan's interest rate; invest if it is higher. Every rupee you prepay earns exactly your loan rate, guaranteed and tax-free, because it removes interest you would otherwise pay. An investment has to beat that rate after tax, and with risk.
On an 8.5% home loan, a SIP in an equity fund has to earn more than about 9.3% a year after tax to leave you richer than prepaying. Long-term equity returns in India have often been above that, but not in every period. Run your own loan through the Loan Prepayment Calculator and your SIP through the SIP Calculator.
Prepay home loan or invest in mutual funds
Here is ₹10,000 a month of spare money on a ₹50 lakh home loan at 8.5% for 20 years (EMI ₹43,391), compared over the full 20 years:
- Prepayput ₹10,000 extra into the loan every month. The loan closes in month 155, 7 years 1 month early, and total interest falls from ₹54.14 lakh to ₹32.35 lakh, a saving of ₹21.79 lakh. From then on, the EMI plus ₹10,000 goes into a SIP.
- Investkeep paying the normal EMI and put ₹10,000 a month into a SIP for all 20 years.
| SIP return a year | Wealth after 20 years: prepay first | Wealth after 20 years: invest |
|---|---|---|
| 8% | ₹58.54 lakh | ₹52.79 lakh |
| 9% | ₹60.44 lakh | ₹58.86 lakh |
| 10% | ₹62.40 lakh | ₹65.77 lakh |
| 12% | ₹66.55 lakh | ₹82.56 lakh |
Figures are after 12.5% tax on long-term gains above ₹1.25 lakh. Prepaying wins at 8–9%; investing wins at 10% and above.
EMI vs SIP calculator
To compare paying extra EMI with a SIP for your own loan, work out two numbers. First, the interest and time you save by prepaying, in the Loan Prepayment Calculator. Second, what the same monthly amount grows to in a SIP over the remaining tenure, in the SIP Calculator.
Then compare like with like: after the loan closes, the prepayer can invest the whole EMI as well, so add what that grows to over the years left. The break-even is the SIP return at which both paths end level. For the ₹50 lakh, 8.5% loan below it is 8.7% before tax and 9.3% after tax on gains: a little above the loan rate, because the SIP's gains are taxed and the interest saved is not.
Is it good to prepay home loan?
Yes, prepaying a home loan is good if you have an emergency fund in place and no costlier debt. It gives a guaranteed return equal to your loan rate, cuts years off the loan and lowers the risk of rising rates on a floating loan.
Pay off costlier debt first: a credit card at about 42% a year or a personal loan at 11–16% costs far more than a home loan. Keep at least 6 months of expenses in an emergency fund before prepaying, because money put into the loan is hard to get back.
When is the best time to prepay home loan?
The best time to prepay a home loan is in the first few years, when most of each EMI is interest. On a ₹50 lakh loan at 8.5% for 20 years, ₹4.21 lakh of the first year's ₹5.21 lakh in EMIs is interest. A prepayment then removes interest that would have been charged for nearly 20 years; the same prepayment in year 15 saves much less.
When to stop prepayment of home loan
Consider stopping prepayments when the interest left on the loan is small compared with what your money could earn elsewhere, which usually happens in the last third of the tenure. If you use the old tax regime, also check the interest deduction: on a ₹50 lakh loan at 8.5% the yearly interest stays above the ₹2 lakh limit for the first 14 years, so prepaying in that period does not reduce your deduction, but once interest falls below ₹2 lakh, each prepayment shrinks it.
Reduce EMI or tenure: which is better?
Reducing the tenure is better: it saves far more interest, because the extra money keeps working against the loan for every remaining year. Reduce the EMI only if your monthly budget is tight.
On a ₹30 lakh home loan at 8.5% for 20 years, a ₹2 lakh prepayment after 2 years saves about ₹6.23 lakh if you keep the EMI and cut the tenure, but only about ₹1.91 lakh if you keep the tenure and lower the EMI. Tell your lender which you want when you prepay; most keep the EMI unless asked.
Home loan prepayment tax benefit
In the old tax regime, a prepayment counts as principal repayment, which is deductible within the ₹1.5 lakh yearly limit of Section 123 of the Income-tax Act, 2025 (formerly 80C), shared with EPF, PPF and other investments. Interest on a home you live in is deductible up to ₹2 lakh a year.
In the new tax regime there is no deduction for principal or interest on a home you live in, so prepaying costs you no tax benefit. Check which regime suits you in the Income Tax Calculator.
Can you prepay home loan?
Yes. You can prepay part or all of a home loan at any time. RBI rules do not allow banks and NBFCs to charge a prepayment or foreclosure penalty on floating-rate loans taken by individuals for purposes other than business, which covers most home loans. Fixed-rate loans can carry a charge; your Key Fact Statement lists it. Some lenders set a minimum prepayment amount.
