A bonus arrives, or savings build up, and the home loan is still running. Should the money go into the loan, or into investments? People argue about this a lot, but the arithmetic is simple once you compare like with like.
The one idea that matters
Every rupee you prepay stops attracting interest at your loan rate for the rest of the loan. So prepaying earns exactly your loan rate, with no risk and no tax. Investing comes out ahead only if your investments earn more than that, after tax.
A home loan quoted at 9% is charged monthly, so it actually costs 9.38% a year once compounded. That is the bar your investments have to clear.
A worked example
A ₹40 lakh loan at 9% with 20 years left (EMI ₹35,989), and ₹5 lakh to put somewhere. Two households, the same money:
- Prepay: put the ₹5 lakh into the loan and keep paying the same EMI. The loan ends 65 months sooner, and ₹18.42 lakh of interest is never paid. After that, the EMI you no longer pay goes into investments.
- Invest: put the ₹5 lakh into investments at an illustrative 8% a year after tax, and pay the loan as it is.
Both spend the same each month. When the loan’s original end date comes, neither owes anything. The prepaying household has ₹28.97 lakh invested; the other has ₹23.30 lakh. Prepaying is ahead by ₹5.66 lakh.
- Prepay the ₹5 lakh₹28.97 lakh
- Invest the ₹5 lakh₹23.30 lakh
₹40 lakh at 9% with 20 years left; ₹5 lakh to put in; investments earn 8% a year after tax. Investment returns are assumed, not promised. Markets can fall.
If your investments earned 10% a year after tax instead, investing would come out ₹3.10 lakh ahead. The switch happens at 9.38%.
| Your return after tax | Prepay leaves | Invest leaves | Ahead |
|---|---|---|---|
| 6% | ₹27.47 lakh | ₹16.04 lakh | Prepay by ₹11.44 lakh |
| 7% | ₹28.21 lakh | ₹19.35 lakh | Prepay by ₹8.86 lakh |
| 8% | ₹28.97 lakh | ₹23.30 lakh | Prepay by ₹5.66 lakh |
| 9% | ₹29.75 lakh | ₹28.02 lakh | Prepay by ₹1.72 lakh |
| 10% | ₹30.54 lakh | ₹33.64 lakh | Invest by ₹3.10 lakh |
| 11% | ₹31.36 lakh | ₹40.31 lakh | Invest by ₹8.95 lakh |
Same loan and ₹5 lakh. The switch is at 9.38%.
Try it
Your return against the loan
- Prepaying comes out ahead by
- ₹5.66 lakh
- Prepay the ₹5 lakh₹28.97 lakh
- Invest the ₹5 lakh₹23.30 lakh
If you deduct home-loan interest
Under the old tax regime, interest on a home loan can reduce your taxable income, up to a yearly limit. Prepaying cuts that interest, so it can cut the tax benefit too.
Say you could deduct up to ₹2 lakh of interest a year and pay tax at 31.2% (an illustrative limit and rate; use your own). Prepaying is then only ₹49,293 ahead, and the break-even return falls to 8.13%. The deduction narrows the gap a lot, because in the early years almost all of your EMI is interest.
The new regime allows few deductions, so check whether yours applies before counting on it. If it does not, the plain comparison above holds.
What the numbers leave out
- Certainty. The loan saving is guaranteed; investment returns are not. A return that beats 9.38% on average can still fall short over your particular years.
- Access. Money in the loan is hard to get back. Money in investments can be used in an emergency.
- Peace of mind. Being debt-free sooner is worth something to many people, and only you can price it.
- Charges. Check whether your loan charges anything for prepaying.
To try your own loan, rate and amount, use the prepay or invest calculator. It also lets you add a yearly amount, charges and your tax deduction.
For education only. Not investment, tax or insurance advice. Examples use the figures stated in the guide; check your own before you act.