How a prepayment saves interest
A home loan uses reducing-balance interest: each month you are charged outstanding × rate ÷ 12. A prepayment drops the outstanding immediately, so every future month's interest is lower. Because the early years of an EMI are almost entirely interest, a prepayment then compounds into a very large saving.
Reduce tenure vs reduce EMI
| Reduce tenure | Reduce EMI | |
|---|---|---|
| Monthly outflow | Unchanged | Lower |
| Loan ends | Sooner | Same date |
| Interest saved | Much higher | Lower |
| Best for | Wealth building | Cash-flow relief |
Prepay or invest?
Prepaying is a guaranteed, tax-free return equal to your loan rate. If your home loan is at 8.5% and you can only earn 6% after tax in a safe instrument, prepay. If you have a disciplined equity SIP expected to beat the loan rate over 10+ years, splitting between the two is reasonable. Always keep an emergency fund before prepaying — money put into a loan is hard to pull back out.
Prepayment charges
Floating-rate home loans to individuals cannot carry a prepayment or foreclosure penalty (RBI rule). Fixed-rate loans may charge 2–4% of the prepaid amount. There is no cap on how much or how often you can prepay a floating-rate loan.
Questions
Reduce tenure or EMI?
Reduce tenure — it saves far more interest. Pick reduce-EMI only for cash-flow relief.
When to prepay?
As early as possible. Early EMIs are mostly interest, so an early prepayment removes years of compounding.
Any penalty?
No, for floating-rate individual home loans. Fixed-rate loans may charge 2–4%.
Prepay or invest?
Prepay when the loan rate beats your safe after-tax return. Keep an emergency fund first.