Home loan calculator: prepay or invest?
You have some extra money each month, or a lump sum. Should it go into prepaying the home loan, or into investments while you keep paying the EMI? Enter your loan and the return you assume; the calculator compares where you end up by the loan's original end date.
How it is calculated
Both choices use exactly the same money each month: the EMI plus the extra amount. Prepay: the extra goes into the loan; the EMI stays the same, so the loan closes early, and from then on the EMI and the extra are invested. Invest: you keep paying the EMI and invest the extra from day one. Interest is charged monthly on the reducing balance; investments grow monthly at the equivalent of the yearly return you assume. At the loan's original end date, both investment pots pay long-term capital-gains tax (12.5% above ₹1.25 lakh, as one sale). With the old-regime deduction, each year's interest (up to ₹2 lakh) cuts your tax at your slab, and that saving is invested too. The break-even return is the investment return at which both choices end level.
Using the result well
The real cost of the loan is its rate after tax benefits. Under the old regime, interest on a self-occupied home is deductible up to ₹2 lakh a year, which lowers the effective rate for those in higher slabs; under the new regime that deduction is not available.
Prepaying gives a certain return equal to the loan rate. Investing has historically earned more over long periods, but not every year. A middle path many borrowers use: keep the SIP running, and put annual bonuses towards the loan.
If you prepay, ask the bank to reduce the tenure rather than the EMI: it saves considerably more interest.
Worked example
A ₹50 lakh loan at 8.5% with 20 years left (EMI ₹43,391) and ₹10,000 a month extra: prepaying closes the loan about 7 years early and saves about ₹21.8 lakh of interest. Investing the ₹10,000 instead at an assumed 12% a year ends about ₹15.4 lakh ahead after tax by the original end date. The break-even return is about 9.5% a year, or about 8.1% if you claim the old-regime interest deduction. (The calculator opens with these numbers.)
Common questions
Should I prepay my home loan or invest in mutual funds?
Compare what the loan costs you after any tax benefit with what your investments can reasonably earn after tax. Prepaying gives a certain return equal to the loan rate; equity funds have historically earned more over long periods but with ups and downs. The calculator shows the break-even return: if you expect to earn clearly more than that, and can sit through market falls, investing has tended to come out ahead.
Does prepaying reduce my EMI or my tenure?
Usually banks keep the EMI the same and shorten the tenure, which saves the most interest. You can ask the bank to reduce the EMI instead; the interest saved is then smaller.
Are there charges for prepaying a home loan?
RBI does not allow banks and housing finance companies to charge individuals a prepayment or foreclosure penalty on floating-rate home loans. Fixed-rate loans may carry a charge; check your loan agreement.
How does the tax deduction change the answer?
Under the old tax regime, interest on a self-occupied home loan is deductible up to ₹2 lakh a year (section 24(b)), and principal counts towards section 80C. The deduction lowers the loan's real cost, which favours investing. Under the new regime there is no deduction for a self-occupied home.
Is it better to do both?
Often, yes: many families keep an emergency fund, invest for long-term goals and use bonuses to prepay part of the loan. Prepaying also lowers risk, since a smaller loan is easier to carry through a job loss.
Illustrations only, not investment or tax advice. Mutual fund returns are not guaranteed and can be negative; the assumed return is yours to choose. Talk to us before acting on a tax estimate.
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