Prepay Your Loan or Invest?
A spare amount each month, paid off the loan or invested, compared on the day the loan would have ended anyway.
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Prepaying saves ₹4,44,430 of interest and ends the loan 4 years sooner. At a 10% assumed return, investing leaves you ₹75,052 ahead when the loan would have ended.
- Interest saved by prepaying₹4,44,430
- Loan ends sooner by4 years
- Prepay, then invest the EMI₹20,55,287
- Invest the spare amount₹21,30,340
How this is worked out
- Prepay: the spare amount goes on top of the EMI; once the loan clears, EMI + spare amount is invested every month until the original end date.
- Invest: the spare amount is invested every month; the loan runs its course.
- Both are compared on the original end date, when both households owe nothing.
Assumptions
- Investment returns are assumed and vary; the loan rate is what prepaying earns for certain.
- Tax benefits on home loan interest and any prepayment charges are left out. Floating-rate loans to individuals carry no prepayment charge under RBI rules.
The formula
Prepay: pay EMI + spare amount until the loan clears, then invest EMI + spare amount until the original end date
Invest: invest the spare amount every month until the original end date
- Original end date: when the loan would have ended at the EMI alone
Both are compared on the original end date, when neither owes anything.
A worked example
Owing ₹20,00,000 at 9% with an EMI of ₹25,000, paying ₹10,000 more a month saves ₹4,44,430 of interest and ends the loan 4 years sooner.
Questions people ask
Should I prepay my home loan or invest?
Prepaying earns exactly your loan rate, for certain. Investing may earn more or less. If the return you can reasonably assume after tax is below your loan rate, prepaying usually ends ahead; above it, investing may. The calculator shows both at your figures.
Is there a charge for prepaying a home loan?
For floating-rate loans taken by individuals for non-business use, RBI rules do not allow prepayment or foreclosure charges. Fixed-rate loans and business loans can carry a charge; check your loan agreement.
Should I reduce the EMI or the tenure after prepaying?
Keeping the EMI and shortening the tenure usually saves more interest. Reducing the EMI frees cash each month. Loans & cards in Savingy shows both for your own loans.
From the Savingy Guide
Related calculators
- Loan EMI Calculator: Calculate your loan EMI, total interest and total repayment for home, car or personal loans. Free EMI calculator with instant results.
- Balance Transfer Calculator: Moving a loan to a lower rate: the EMI and interest both ways, the net saving after the transfer fee, and the month the fee is earned back.
- Home Loan Affordability Calculator: See the EMI your income leaves room for under a lender's FOIR, the home loan it repays, and the home price that loan and your down payment buy.
Sources
Estimates are for illustration only and assume constant returns. Actual returns vary with market conditions. This is not investment advice.