Prepay Your Home Loan or Invest? Run the Numbers, Not the Advice

This question gets answered with slogans — "debt-free is priceless", "equity always wins over fifteen years" — when it is really an arithmetic problem with three inputs.

What prepayment actually buys

A ₹25,00,000 home loan at 8.75% over 20 years. The EMI is ₹22,093 and total interest ₹28.0 lakh.

Add ₹5,000 a month:

	Without prepayment	With ₹5,000/month extra
Loan closes in	20 years	12 years 10 months
Total interest	₹28.0 lakh	₹16.7 lakh
Total repaid	₹53.0 lakh	₹41.7 lakh

You pay ₹7.7 lakh of extra instalments over those 154 months and your total outflow falls by ₹11.4 lakh. Every rupee of prepayment is a guaranteed, risk-free 8.75% return.

What the alternative buys

That same ₹5,000 a month in an equity SIP at an assumed 12% for 12 years 10 months grows to roughly ₹16 lakh, of which about ₹7.7 lakh is your own money.

So on paper, investing wins. But the two returns are not comparable without adjusting for two things.

Adjustment one: tax

Under the old regime, Section 24(b) lets you deduct up to ₹2,00,000 of home loan interest a year. At the 30% slab that reduces the effective cost of an 8.75% loan to roughly 7.24% in the early years, when annual interest is above the cap.

Under the new regime, there is no such deduction on a self-occupied property. The loan costs the full 8.75%.

This flips the answer for a lot of people. Prepaying an 8.75% loan is a guaranteed 8.75%. Prepaying a loan that effectively costs 7.24% is a guaranteed 7.24%, and the case for equity strengthens.

Note also that the tax benefit shrinks every year. Early EMIs are almost all interest, so the ₹2,00,000 cap is fully used at the start and stops binding once annual interest falls below it. The tax argument for keeping the loan is strongest in year one and weakest in year fifteen — the opposite of most people's intuition. The home loan tax benefit calculator shows the year-by-year decline.

Adjustment two: risk

8.75% guaranteed is not the same asset class as 12% expected.

The 12% figure is a long-run average for Indian equity. Individual thirteen-year windows have delivered well below it, and sequence matters — a poor final five years leaves you with far less than the average implies, at exactly the point you were counting on it.

Prepayment has no such variance. The ₹11.4 lakh is certain.

Timing beats amount

Prepayment in year 2 is worth far more than the same money in year 15, because early EMIs are almost entirely interest. On the ₹25 lakh loan, the first instalment splits ₹18,229 interest and ₹3,864 principal.

Money removed from the balance early stops accruing interest for eighteen more years. The identical amount near the end removes almost nothing. If you receive an annual bonus, applying it every year from the start is worth substantially more than saving several years' bonuses for one large prepayment later.

Check the penalty first

RBI prohibits foreclosure and prepayment charges on floating-rate home loans taken by individuals, which covers most Indian home loans. Fixed-rate loans and loans to firms can still carry 2–4%. Personal and car loans routinely do, often with a lock-in.

Read the sanction letter. On a fixed-rate loan a 3% charge on ₹5 lakh is ₹15,000 up front.

A framing that works for most people

Rather than choosing one, most borrowers land somewhere sensible on this:

1. Clear genuinely expensive debt first. Credit cards at 36–42% and personal loans at 14–18% beat both options by a distance. Nothing else should be considered until these are gone.
2. Build an emergency fund. Six months of expenses in something liquid. Prepaying with no buffer means borrowing at 18% the next time something breaks.
3. Then split. Prepay enough to clear the loan comfortably before retirement, invest the rest. The split is a function of how much variance you can tolerate, not of which asset has the higher expected return.

Run yours

The EMI prepayment calculator shows the interest saved and months cut for your own loan and extra amount, and includes a table comparing several prepayment levels. Pair it with the SIP calculator for the other side of the comparison.

Then decide on your own numbers rather than someone else's slogan.