A bonus, a maturing FD or some savings can go towards your home loan. When you prepay, the bank usually asks you to choose: keep the EMI and shorten the tenure, or keep the tenure and lower the EMI. The choice makes a big difference to how much interest you save.
How prepayment saves interest
Interest each month is charged on the outstanding balance. A prepayment cuts that balance straight away, so every later month's interest is smaller. The difference between the two options is what happens next:
- Reduce tenure: your EMI stays the same. Because less of it now goes to interest, more goes to principal, and the loan ends sooner.
- Reduce EMI: your EMI is recalculated on the smaller balance over the original remaining term. You pay less each month, but for the same number of months.
A worked example
Take a loan with ₹30 lakh outstanding at 8.5% and 15 years left. The EMI is about ₹29,542. You prepay ₹5 lakh today.
| Reduce tenure | Reduce EMI | |
|---|---|---|
| New EMI | ₹29,542 (unchanged) | about ₹24,618 |
| Loan ends | 4 years 2 months earlier | on the original date |
| Interest saved | about ₹9.89 lakh | about ₹3.86 lakh |
The same ₹5 lakh saves more than two and a half times as much interest when you reduce the tenure.
When reducing the EMI still makes sense
- Your monthly budget is tight, or your income is irregular.
- You want to free up cash for a higher-priority goal, such as an emergency fund or a child's education.
- You plan to invest the difference every month. That only wins if your after-tax return beats the loan rate.
Check these first
- Emergency fund. Money paid into a loan is hard to get back. Keep several months of expenses liquid before prepaying.
- Charges. RBI rules do not allow banks to charge prepayment penalties on floating-rate home loans taken by individuals. Fixed-rate loans can carry charges, so check your loan agreement.
- Tax. Under the old regime, interest on a self-occupied home loan is deductible up to a limit, and principal counts towards 80C. Prepaying lowers future interest, and with it that deduction. The new regime gives no deduction for a self-occupied home, so tax does not change the decision there.
- Costlier debt first. A personal loan or a credit card balance almost always costs more than a home loan. Clear those first.
Try it
The home loan prepayment calculator compares both options with your own numbers, including a regular monthly extra payment. The EMI calculator shows the full repayment schedule.