A home loan is usually the biggest debt a family takes on, and over 20 years the interest can add up to more than the loan itself. Prepaying, which means paying back part of the principal ahead of schedule, is one of the simplest ways to cut that cost. How much it saves depends heavily on when you prepay and how.
The Starting Point: A ₹40 Lakh Loan
Take a ₹40 lakh home loan at 8.5% a year for 20 years. The EMI works out to about ₹34,713 a month. Over 240 months you would pay about ₹83.3 lakh in total, of which roughly ₹43.3 lakh is interest, more than the amount you borrowed.
The reason is the reducing-balance method banks use. Each month's interest is charged on the principal still outstanding. In the early years the balance is large, so most of the EMI goes to interest and only a small part reduces the loan. Any extra payment you make goes straight to the principal, so it also cuts every future month's interest on that amount.
One Lump Sum: Timing Is Everything
Here is what a one-time prepayment of ₹2 lakh does to the same loan, keeping the EMI unchanged so that the tenure shrinks:
| When you prepay ₹2 lakh | Interest saved | Loan ends earlier by |
|---|
| End of year 1 (month 12) | ₹7,13,109 | 2 years 2 months |
| End of year 5 (month 60) | ₹4,67,593 | 1 year 7 months |
| End of year 10 (month 120) | ₹2,47,203 | 1 year |
The same ₹2 lakh saves almost three times as much when it is paid in the first year rather than the tenth. Money prepaid early stops attracting interest for all the remaining years, so the earlier it goes in, the more it saves.
Small Monthly Extras Add Up
Not everyone has a lump sum, but many people can add a little to each EMI. On the same loan:
| Extra paid every month | Interest saved | Loan ends earlier by |
|---|
| ₹5,000 | ₹12,98,954 | 5 years 2 months |
| ₹10,000 | ₹19,69,555 | 8 years 1 month |
An extra ₹5,000 a month, about 14% more than the EMI, cuts the loan from 20 years to under 15 and saves nearly ₹13 lakh. Many borrowers find it easier to raise the EMI slightly after each salary increase than to save up a large lump sum.
Reduce the Tenure or the EMI?
After a prepayment, most banks let you either keep the EMI the same and finish sooner, or keep the end date and lower the EMI. Keeping the EMI and reducing the tenure saves far more interest, because the loan runs for fewer months. Reducing the EMI makes sense when your monthly budget is tight and you want breathing room. All the figures above assume the tenure is reduced.
Before You Prepay
- Check the charges. RBI rules do not allow banks to charge a prepayment penalty on floating-rate home loans taken by individuals. Fixed-rate loans and loans from some lenders can carry a charge, so read your loan agreement.
- Keep an emergency fund first. Money put into a home loan cannot easily be taken back out. Keep several months of expenses aside before prepaying.
- Compare with the tax benefit. Under the Old Tax Regime, home loan interest on a self-occupied house can be deducted up to a limit, which lowers the effective cost of the loan. Under the New Tax Regime that deduction is not available, which makes prepaying relatively more attractive.
- Compare with your other options. Prepaying a loan at 8.5% is like earning a guaranteed 8.5% return. If a high-interest debt such as a credit card or personal loan is outstanding, clear that first.
Loan rates and lender policies vary, so treat these figures as an illustration. Enter your own loan amount, rate, tenure and prepayment plan in our home loan EMI calculator below to see exactly how much you would save.