Prepay your home loan or invest the money?
A fair, rupee-for-rupee comparison — and a simple way to decide based on your loan rate, your returns and your temperament.
You have some spare money — a bonus, a raise, a maturing FD. Should it go towards the home loan, or into a SIP? Most advice picks a side. A fairer way is to compare both paths spending exactly the same money, and see where you end up.
Making the comparison fair
- Prepay path: the extra money goes to the loan. The loan closes years early. From then on, the EMI you no longer pay gets invested.
- Invest path: the loan runs its full term. The extra money is invested from day one.
At the end of the original loan term, compare your wealth.
Investing wins at this return — if the market delivers it.
What the numbers say
For a ₹40 lakh loan at 8.5% over 20 years, with ₹1 lakh extra each year:
- Prepaying saves about ₹17 lakh in interest and closes the loan seven years early.
- If investments return 10%, investing ends up ahead: about ₹46 lakh vs ₹41 lakh (before tax on the gains; about ₹43 lakh after it).
- At 7%, prepaying wins: about ₹37 lakh vs ₹31 lakh.
The tipping point sits close to your loan rate. Prepaying is an investment that earns exactly your loan rate, guaranteed and tax-free. Investing beats it only if you earn more, and only if you actually stay invested through bad years.
Questions that decide it for you
- Is your loan rate high? Above about 9%, prepaying is hard to beat with safe investments.
- Are you in the old regime and using the home-loan deductions? Interest up to ₹2 lakh and principal under 80C cut your tax, which lowers the loan’s real cost. In the new regime there’s no such benefit, which makes prepaying more attractive.
- Do you have an emergency fund? Money prepaid into a loan is hard to get back. Keep 6 months of expenses liquid first.
- How do you sleep? Being debt-free has real value that no spreadsheet captures.
A sensible middle path
Many people split it: prepay a fixed amount every year (say, part of the bonus) and keep SIPs running. Prepayments early in the loan do the most good, since that’s when most of your EMI is interest. Banks can’t charge for prepaying a floating-rate home loan taken by an individual, so you can do this freely. Fixed-rate loans may still carry a charge; check your sanction letter.
Try your own loan in the prepayment calculator, which runs this same comparison.