A lump-sum prepayment on a home loan does two useful things at once: it shrinks the principal that compounds against you, and it shortens the tenure or lowers the EMI depending on what you tell the bank to do.
About this calculator
A lump-sum prepayment on a home loan does two useful things at once: it shrinks the principal that compounds against you, and it shortens the tenure or lowers the EMI depending on what you tell the bank to do. Both save interest, but which one actually maximises your wealth depends on the rate you are paying versus the return your money could earn somewhere else over the same period. This calculator runs both sides of the trade: on one axis the cumulative interest you save by prepaying, on the other the corpus that same lump-sum would build in an SIP or equity mutual fund at your expected return over the loan's remaining tenure.
The math is not symmetric. Interest on the loan is charged on the outstanding balance, so early prepayment has an outsized effect. A 5 lakh prepayment in year three of a twenty-year loan at 8.5% saves a different amount than the same prepayment in year fifteen. Similarly, SIP growth compounds, so the longer the remaining tenure, the more the SIP side can catch up. The verdict flips around a crossover rate that usually sits between 9% and 12% depending on tenure and how aggressive your SIP assumption is.
Reduce-tenure mode is almost always the smarter default if your cash flow can take the same EMI, because you save more absolute interest. Reduce-EMI mode helps free monthly cash for other goals like a child's education or a down payment on a second property. The [[emi]] calculator shows the baseline EMI, [[amortization]] breaks down each payment, and [[sip]] projects long-run SIP growth if you prefer to see that side first.
Common uses
- Deciding whether to prepay a 5 or 10 lakh lump sum on a home loan or invest in an index fund
- Evaluating whether to use a year-end bonus to close the loan faster versus top up mutual funds
- Comparing the tenure cut from a one-time prepayment against staying the course at a lower EMI
- Stress-testing how the prepay-versus-invest verdict changes with SIP return assumptions from 10% to 14%
- Planning phased prepayments in years 3-6 of tenure, when principal reduction has the biggest effect
Frequently asked questions
Is it better to prepay a home loan or invest in SIP?
If your home-loan rate is higher than the post-tax return you realistically expect from equity SIP, prepay. At 8.5% loan rate and 12% equity return the SIP wins on paper, but only if you actually invest every rupee and stay the course for ten years or more. Most people prepay and treat the saved interest as a certain return, which is psychologically easier.
Should I cut EMI or cut tenure after prepaying?
Cut the tenure if your cash flow allows it. Keeping the same EMI and closing the loan earlier saves significantly more total interest than dropping the EMI across the original tenure. Cut EMI only if you need monthly room for other commitments like insurance, school fees, or a new SIP you want to start.
When is the best time to make a home loan prepayment?
Early in the tenure, ideally in years 2-6 when most of your EMI is going to interest. A one-time prepayment in year three saves dramatically more interest than the same amount in year fifteen. Banks usually allow free prepayment on floating-rate home loans without penalty.
Does prepayment affect my tax deduction?
You lose a small portion of the Section 24 interest deduction if prepayment drops your annual interest below 2 lakh in the old regime. Run both scenarios: the interest saving almost always beats the lost deduction, and the new tax regime does not include this deduction anyway.
How much should I prepay to save 10 lakh in interest?
It depends on your rate and remaining tenure, but a rough thumb rule for a 20-year home loan at 8.5% is that every 1 lakh prepaid in year 3 saves about 2.2-2.4 lakh in interest if you also reduce tenure. Use the calculator with your exact numbers for a precise answer.