Prepayment Basics
Prepaying in the early years saves the most interest because the interest component is highest at the start of the loan. Two options after prepayment:
- Reduce Tenure: Keep EMI same, finish loan earlier (max interest saved)
- Reduce EMI: Keep tenure same, lower monthly burden (cash-flow friendly)
Scenario 1: Early Prepayment (Year 2)
Loan: ₹50L, 9% p.a., 20 years | EMI: ₹44,986
Prepay: ₹5L in Year 2
- Tenure Reduction: Loan ends ~3 years early; interest savings ≈ ₹9–10L
- EMI Reduction: EMI drops to ~₹40,400; interest savings ≈ ₹6–7L
Scenario 2: Late Prepayment (Year 10)
Prepay: ₹5L in Year 10
- Tenure Reduction: ~2 years saved; interest savings ≈ ₹5–6L
- EMI Reduction: EMI ~₹41,900; savings ≈ ₹3–4L
Note: Savings are lower than early prepayment because more interest is already paid in earlier years.
Part-Prepayment Strategy
- Annual bonus/top-up SIP → prepay 5–10% each year in first 5 years
- Always prefer tenure reduction for maximum interest saving
- Check prepayment charges (usually NIL for floating-rate home loans)
Prepay vs Invest?
If expected post-tax investment return > loan rate, splitting may be optimal:
- Example: Loan 9%, expected equity SIP 12% → Prepay some + Invest some
- Risk tolerance matters; guaranteed saving from prepayment vs market risk
Use Tools
- EMI Calculator – compare prepayment scenarios
- SIP Calculator – compare invest vs prepay