Home Loan Prepayment: Should You Reduce the EMI or the Tenure?

When you prepay a home loan, keeping the EMI and cutting the tenure saves far more interest than keeping the tenure and lowering the EMI. Choose a lower EMI only if your monthly budget is tight.

A worked example

Take a ₹50 lakh home loan at 8.5% for 20 years. The EMI is ₹43,391 and the total interest over the loan is ₹54.1 lakh.

After 2 years you still owe about ₹47.9 lakh. You prepay ₹5 lakh.

Cutting the tenure takes about 3.8 years off the loan.

Why early prepayments save the most

In the first years, most of each EMI is interest. Money you prepay early removes principal that would otherwise collect interest for almost the whole term.

Prepay or invest?

If your loan costs 8.5% and you expect 11% to 12% from equity over the long term, investing can end ahead, but with risk. Prepaying is a guaranteed return equal to your loan rate. Many people split surplus money between the two. Compare both in the prepay vs invest calculator.

Before you prepay

• Keep an emergency fund of 6 months of expenses first.
• Floating-rate home loans to individuals carry no prepayment penalty in India; check your sanction letter for fixed-rate loans.
• Under the old tax regime, you lose part of the interest deduction (up to ₹2 lakh a year on a self-occupied home) as interest falls, so factor that in.