worldofcalcsPrepay Your Home Loan or Invest the Money? A Worked Comparison
You have ₹10,000 a month spare and a home loan at 8.5%. Should you pay the loan off faster, or invest the money? Here are the numbers on a typical loan, and the factors beyond the numbers.
The loan
A ₹30,00,000 home loan at 8.5% for 20 years has an EMI of ₹26,035.
Option 1: Prepay ₹10,000 a month
- The loan closes in 127 months instead of 240, 113 months (over 9 years) early.
- You save ₹17,00,094 in interest.
- After the loan closes, you can invest the full ₹36,035 a month (the EMI plus the ₹10,000) for the remaining 113 months.
- At 12%, that grows to about ₹75,64,093.
- At 8.5%, it grows to ₹62,51,410.
Option 2: Invest ₹10,000 a month, keep the loan
Keep paying the normal EMI for 20 years, and put ₹10,000 a month into a mutual fund SIP for the same 20 years:
| Average return | Value after 20 years |
|---|---|
| 12% | ₹99,91,479 |
| 10% | ₹76,56,969 |
| 8% | ₹59,29,472 |
These figures are before tax on the gains.
What the numbers say
Both paths cost the same ₹36,035 a month for 20 years and end with the loan repaid. The difference is what you've built up by then, after tax on fund gains (assuming everything is sold in the final year):
| Average return on investments | Prepay first, then invest | Invest alongside the loan |
|---|---|---|
| 12% | ₹71,26,360 | ₹90,20,837 |
| 10% | ₹64,41,508 | ₹69,89,813 |
| 9% | ₹61,31,721 | ₹61,82,445 |
| 8% | ₹58,41,696 | ₹54,86,891 |
- At 12%, investing ends about ₹19 lakh ahead.
- At 10%, investing is still about ₹5.5 lakh ahead.
- At around 9%, the two come out level after tax.
- Below that, prepaying wins, and it carried no risk.
Prepaying earns a guaranteed return equal to your loan rate: every rupee prepaid saves 8.5% a year in interest, tax-free. Investing has to beat that after tax and after bad years, which equity has usually done over 15–20 years, but not always.
The tax angle
- Old regime: home loan interest up to ₹2,00,000 a year is deductible on a self-occupied house. In the 30% bracket, that cuts the real cost of the loan to well below 8.5% on the deductible part, which makes prepaying less attractive. Beyond ₹2 lakh of interest, there is no further benefit.
- New regime: there is no deduction for a self-occupied home, so the loan costs the full 8.5%.
A simple way to decide
- First, build an emergency fund of 6 months' expenses, including the EMI. Don't prepay with money you might need.
- Clear expensive debt first: credit cards, personal loans and car loans before a home loan.
- Then split. Many people prepay a fixed amount (for example one extra EMI a year from their bonus) and invest the rest. That cuts years off the loan while still building wealth.
- Lean towards prepaying if your loan rate is above 9%, you're in the new regime, you're within 10 years of retiring, or debt worries you.
- Lean towards investing if your rate is low, you claim the full interest deduction in the old regime, and you have 15 or more years to invest.
Floating-rate home loans to individuals have no prepayment penalty. When you prepay, ask the bank to reduce the tenure rather than the EMI: that saves more interest.
Try your own numbers
The loan prepayment calculator shows the interest and time saved for your loan. The SIP calculator shows what the same money could grow to, and the EMI calculator lets you compare tenures.
Mutual fund returns are not guaranteed; the figures assume constant returns for illustration.