Home loans
Prepay your home loan or invest in mutual funds?
Prepaying ₹5 lakh on a ₹30 lakh home loan in year 3 saves about ₹12.9 lakh in interest and ends the loan 5 years and 8 months early. Investing the same ₹5 lakh can beat that, but only if your returns stay well above your loan rate.
The example
A ₹30 lakh loan at 8.5% for 20 years, with an EMI of ₹26,035. After 2 years of EMIs, about ₹28.75 lakh is still owed. You get a ₹5 lakh bonus.
Option 1: Prepay the loan
- Keep the EMI the same and let the tenure shrink.
- The loan closes in month 172 instead of month 240.
- You save ₹12.9 lakh in interest, guaranteed.
- For the last 68 months, the ₹26,035 EMI is free. Invested in a SIP at 12%, it grows to about ₹25.4 lakh by the original end date.
Option 2: Invest the ₹5 lakh
Put ₹5 lakh into an equity fund for the remaining 18 years and keep paying the full loan.
| Fund return | Value after 18 years (before tax) |
|---|---|
| 12% a year | ₹42,89,303 |
| 10% a year | ₹30,02,347 |
| 8.5% a year | ₹22,96,668 |
Side by side at year 20
| Assumed return | Prepay, then invest the freed EMI | Invest ₹5 lakh now |
|---|---|---|
| 12% | about ₹25.4 lakh | about ₹42.9 lakh |
| 10% | about ₹23.9 lakh | about ₹30.0 lakh |
On paper, investing wins at 10% and above. But investing also means taking on market risk, paying capital gains tax when you sell, and living with the loan for 5 extra years.
How to decide
- Prepay if your loan rate is above about 9%, you want guaranteed savings, or a smaller loan helps you sleep better.
- Invest if your rate is low, you have 10 or more years, and you can stay invested through market falls.
- Under the old tax regime, you can deduct up to ₹2 lakh of home loan interest a year, which makes the loan slightly cheaper and investing a little more attractive.
- Many people split it: half to prepayment, half to investments.
Whichever you choose, keep 6 months of expenses in an emergency fund first.
See your own loan's interest breakdown
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