Loan prepayment
What does prepaying your home loan actually save?
Prepayment advice is usually given in the abstract. The numbers are specific, they depend heavily on when you prepay, and they are large enough to be worth calculating properly.
₹50,00,000 at 8.5% over 20 years, EMI ₹43,391, total interest ₹54,13,879
| What you do | Interest paid | Interest saved | Loan ends |
|---|---|---|---|
| Nothing | ₹54,13,879 | - | 20 years |
| ₹5,00,000 prepaid in year 3 | ₹40,94,240 | ₹13,19,639 | 3.4 years earlier |
| ₹5,00,000 prepaid in year 5 | ₹43,44,726 | ₹10,69,153 | 3.0 years earlier |
| ₹5,00,000 prepaid in year 10 | ₹48,42,497 | ₹5,71,382 | 2.0 years earlier |
| One extra EMI at the end of every year | ₹43,84,743 | ₹10,29,136 | 3.3 years earlier |
The same ₹5 lakh saves ₹13.2 lakh in year three and ₹5.7 lakh in year ten. Timing is not a detail here; it is most of the answer.
Why early prepayment is worth so much more
An EMI is front-loaded with interest. In the first years most of each instalment pays interest and very little reduces the balance, because interest is charged on an outstanding amount that has barely moved.
Prepaying early removes principal that would otherwise have accrued interest for seventeen more years. Prepaying late removes principal that had only a few years left to run. Identical rupees, very different effect.
Reduce the tenure, not the EMI
After a prepayment most lenders offer a choice: keep the EMI and shorten the tenure, or keep the tenure and reduce the EMI. Almost all of the saving in the table above comes from the first option.
Reducing the EMI feels better every month and gives up most of the benefit, because the loan still runs its full term and still accrues interest across it. Unless the monthly outflow is genuinely straining you, shorten the tenure.
One extra EMI a year
If a lump sum is not available, paying one additional instalment each year does something similar with money most people can actually find: a bonus, arrears, a tax refund. On the loan above it saves about ₹10.3 lakh and finishes the loan more than three years early.
It also has the advantage of being repeatable. A single prepayment is an event; an extra EMI every year is a policy, and policies compound.
Before you prepay
Three checks, in order.
- Is there costlier debt? A credit card at roughly 40% a year or a personal loan in the teens should be cleared first, without debate.
- Is your emergency buffer intact? Money paid into a loan cannot be taken back out. Never prepay from the buffer.
- Which tax regime are you in? Under the old regime, home loan interest on a self-occupied property is deductible, which lowers your effective rate and weakens the case for prepaying. Under the new regime it is not.
On floating-rate home loans to individuals, lenders in India generally cannot levy a foreclosure or prepayment charge, but confirm it against your own sanction letter before assuming it.
Frequently asked questions
Results are estimates for education and planning, not financial advice.
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