Say your ₹30 lakh home loan is at 8.5% for 20 years (EMI ₹26,035). Three years later you get a bonus and prepay ₹2 lakh. You now have two options:
| Option | New EMI | Loan ends in | Total interest | Interest saved |
|---|---|---|---|---|
| No prepayment | ₹26,035 | 240 months | ₹32,48,327 | - |
| Reduce tenure | ₹26,035 | 211 months | ₹26,85,839 | ₹5,62,488 |
| Reduce EMI | ₹24,178 | 240 months | ₹30,69,584 | ₹1,78,743 |
Why reducing the tenure wins
When the EMI stays the same, a bigger share of every instalment goes to the principal, and the loan ends about 2.4 years earlier. Putting in just ₹2 lakh saves ₹5.6 lakh of interest.
Reducing the EMI gives ₹1,857 of relief every month, which helps when your job or expenses are uncertain, but the interest saved is less than a third.
Three checks before you prepay
- Keep an emergency fund (at least 6 months of expenses) aside; money put into a loan is not easy to take out.
- Prepayment charges: most banks charge nothing on floating-rate home loans, but check your loan agreement.
- Under the old tax regime home loan interest is deductible, and a prepayment reduces that deduction too. The new regime gives no such deduction on a self-occupied home.
Working: prepayment after the 36th instalment, rate 8.5% throughout.
Change the amount, rate and tenure and see it instantly.
Frequently asked questions
Is it fine to prepay a little every year?
Yes. Every prepayment in the early years saves the most interest, because the outstanding principal is largest then.
Should I prepay or put the same money in a SIP?
It depends on your loan rate, how much risk you can take and tax. The 'return' from a prepayment equals your loan rate and carries no risk; a SIP's return is not fixed.