Prepay your home loan or invest the extra money?

Prepaying a home loan saves interest at the loan's rate, while investing the same money might earn more or less. Neither route wins in every case. This page sets out how to compare them fairly, works one example at three assumed returns, and lists what the sum leaves out.

Is it better to prepay a home loan or invest?

Neither is better in general, because the two choices carry different kinds of result. Prepaying means paying part of the loan's principal, the amount you still owe, ahead of schedule. Paying part of it is called part-prepayment. Every rupee prepaid saves interest at the loan's rate. Investing gives a return that nobody can promise, and it can be higher or lower than that rate.

A handful of things decide how the comparison comes out:

• the loan's interest rate, and whether it is fixed or floating (a floating rate can change during the loan)
• the yearly return you assume on an investment, and how sure you are of it
• tax on both sides
• how soon you might need the money back
• whether your emergency reserve is already set aside
• any other debt that costs more than the home loan

The rest of this page takes them one at a time.

What does prepaying a home loan actually earn you?

Every rupee you prepay saves interest at the loan's rate for as long as the loan would have run. Take Meera, who has ₹4,00,000 from a bonus after setting her emergency reserve aside. She owes ₹30,00,000 on a floating-rate home loan, with 15 years left. These figures are assumed for the example: the rate is 8.75% a year and her EMI (the fixed instalment she pays the lender each month) is ₹29,983.

Suppose she puts the ₹4,00,000 into the loan and keeps paying ₹29,983 a month. The loan then ends after 138 EMIs, which is 11 years 6 months instead of 15 years. The interest still to be paid falls from ₹23,97,111 to ₹15,28,994, a saving of ₹8,68,117.

Loan interest is charged monthly. An assumed 8.75% charged that way costs about 9.11% a year once the months compound. That is the figure an investment has to beat after tax to come out level.

Prepaid money cannot be taken back out of the loan. For how to prepay, and the choice between a lower EMI and a shorter tenure (how long the loan runs), see how to pay off your home loan faster.

How do you compare prepaying with investing the same money?

Keep the monthly payments identical in both cases, then compare where you stand on the day the prepaid loan would have ended. Any other setup compares different cash flows and tells you little.

In Meera's second option she invests the ₹4,00,000 as a lumpsum (a larger amount invested at one time) and leaves the loan alone, still paying ₹29,983 a month. After 138 EMIs her original loan still has ₹10,81,483 outstanding. The investment grows at an assumed yearly return, which means a CAGR, the average yearly growth rate over the period. Each row below is assumed, not a forecast. The second and third columns are before tax.

A minus sign means the investor is behind the person who prepaid by that much. A plus sign means ahead. At an assumed 8% the investor is behind. At assumed returns of 10% and 12% the investor is ahead before tax, and at 10% the lead shrinks to ₹31,473 once tax is taken off.

The break-even point sits close to 9%. At an assumed 9% a year the investment would be worth ₹10,77,618, which is ₹3,865 short of the loan before any tax. So the investment needs about the loan's yearly cost, and more once tax comes off its gain, just to draw level.

All three returns are assumptions. Investments can fall in value, and past performance may or may not be sustained in future. AMFI's illustration rates top out at 12.80%, so no example here goes above that.

To run your own numbers, use the home loan calculator for the EMI, and the lumpsum calculator or the SIP calculator for an assumed return. A SIP means investing a fixed amount at regular intervals, usually monthly. None of these tools does the comparison for you, so put the results side by side.

How does tax change the answer?

Tax trims the investment's return, and under the old tax regime only, prepaying can also trim a home loan interest deduction. The old tax regime is the older set of income-tax rules, which allows deductions such as this one. The new tax regime is the default, with lower rates and few deductions. The new regime gives no interest deduction on a home you live in, so only the investment side is taxed.

The table's tax column rests on stated conditions. It assumes an equity-oriented fund (one with at least 65% in Indian listed shares) held more than 12 months. It also assumes the whole gain is long-term, is taken in one tax year, and comes with no other equity gains that year. Long-term gains on such a fund, held more than 12 months, are taxed at 12.5% on the part above ₹1,25,000 a year, before the 4% cess. The ₹1,25,000 allowance is one allowance for you for the whole tax year. For the detail on fund tax, read how SIP returns are taxed.

Under the old regime, a borrower who claims interest as a deduction loses part of it by prepaying, which slightly favours investing. The deduction has its own limit, set out in home loan tax benefits.

A fixed deposit changes the picture a little. FD interest is added to your income and taxed at your slab rate, the rate that applies to your band of income. A deposit that earns less than the loan rate before tax cannot beat prepaying on the numbers, and tax widens the gap. For dated reference points, the PPF rate is 7.1% for October to December 2026, and small-savings rates are reviewed every quarter.

What else should you weigh besides the numbers?

Three things sit outside the sum: how quickly you can get the money back, how a fall in the investment would feel, and whether the loan rate can change.

Getting the money back. Prepaid money is locked into the house. An investment can be sold, but it may be worth less on that day. Keep your emergency reserve, money set aside for sudden needs, in place first. Where to keep your emergency savings puts it at three to six months of expenses.

Living with a fall. An investment can drop in value while the loan stays exactly as large. How much of that you could sit through is a personal matter, covered in what risk tolerance is.

A rate that moves. A floating rate moves both ways, so both options' figures above would move with it. When the rate is reset, RBI requires the lender to offer a higher EMI, a longer tenure or a mix of the two. It must also offer the choice to prepay, in part or in full, at any point in the loan.

The example stops at month 138 on purpose. After that, Meera in the first option can start investing the EMI that is freed up. In the second option she still has about three and a half years of EMIs left to pay.

You can also split the money, part to the loan and part to an investment. The same comparison applies to each rupee. Near retirement the same questions apply, and the post on planning for retirement from your 40s covers the loan question there.

Is there a charge for prepaying?

Suppose your loan is on a floating rate and you took it as an individual for a purpose other than business, such as a home loan. An RBI-regulated lender cannot then charge you for prepaying it. That holds in part or in full, from any source of money, and whatever the loan's age. On a fixed-rate loan the lender may charge what its policy and your loan papers say, worked out on the amount you prepay. Check which kind of rate your loan has before assuming either.

When you close the loan, the lender must hand back your original property papers and remove its charge from the registry within 30 days. If it is late through its own fault, it owes you ₹5,000 for each day of delay.

What about other loans: credit card, personal or car?

The same comparison applies to any loan: set its rate against what the money could earn after tax, and weigh the risk.

Check the rate on your statement or loan agreement; the higher it is, the harder it is for any investment to beat it. A car loan works the same way. For a card balance carried over, see personal loan or credit card. For a plan to clear costly debt, see what a debt trap is and how to get out of one.

Some people borrow against mutual funds instead of selling them; loan against mutual funds explains how that works. Rent against buying is a separate question, taken up in is buying a house really an investment.