Owning a home is a dream for every family, but owning it often involves taking out a loan. A loan is a long-term financial commitment, and finding ways to optimize it can lead to substantial savings and financial security. One practical and effective strategy homeowner can employ is regularly pre-paying a portion of their home …
Owning a home is a dream for every family, but owning it often involves taking out a loan. A loan is a long-term financial commitment, and finding ways to optimize it can lead to substantial savings and financial security. One practical and effective strategy homeowner can employ is regularly pre-paying a portion of their home loan. In this article, I will explain why it is better to pre-pay part of your home loan prepayments regularly and ways to do it.
Before we get into the benefits of pre-paying a home loan, it’s essential to understand what home loans and prepayments are;
A home loan is a financial product that allows individuals to purchase a home by borrowing money from a lender (bank). The borrower (you) agrees to repay the loan amount over a specified period, usually 15, 20, or 30 years, along with interest.
>Home loan prepayment refers to making additional payments toward the principal loan amount in addition to the regular EMI (Equated Monthly Instalment). These extra payments can be made anytime, reducing the loan’s outstanding balance. However, rules differ from bank to bank. Many banks do not allow the borrower to make early prepayments as the bank knows the maximum interest they can earn as a lender is at the beginning of the loan tenure. Hence, checking prepayment conditions while you opt for the loan is essential.
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Now that we have a basic understanding of home loans and prepayment let’s explore the numerous advantages of regularly pre-paying your home loan.
(1) Interest Savings
One of the most compelling reasons to make regular prepayments is the significant interest savings over the life of the loan. When you make additional payments towards the principal, you reduce the outstanding balance on which interest is calculated. As a result, you’ll pay less interest over the long term, potentially saving lakhs.
(2) Faster Loan Closure
Regular prepayments accelerate the process of paying off your home loan. Reducing the principal balance can shorten the loan term, allowing you to become debt-free sooner than planned. This can free up your cash flow for other goal investments such as retirement planning or your children’s education.
(3) Improve Financial Security
Paying off your home loan faster reduces your debt and enhances your financial security. Owning your home outright means you won’t have to worry about loan payments, providing peace of mind and financial stability during your lifespan.
Now that we’ve understood the benefits of regular loan prepayments, let’s explore some practical and effective strategies to incorporate this practice into your financial plan.
Consider lump sum payment towards your home loan principal whenever you have extra funds, such as a bonus tax refund; this can immediately impact your loan balance.
Let’s compare the scenarios.
Scenario-1
| Scenario-1 (Continue Loan As Scheduled) | |
| Loan | 1,00,00,000 |
| Annual Interest Rate | 8% |
| Loan Period in Year | 20 |
| EMI | 83,644 |
| Total Interest | 1,00,74,562 |
Scenario-2
| Scenario-2 (Extra Payment Made Annually- Rs. 5 lakhs) | |
| Loan | 1,00,00,000 |
| Annual Interest Rate | 8% |
| Loan Period in Year | 20 |
| EMI | 83,644 |
| Extra Payment Made Annually | 5,00,000 |
| Loan Period in Year Reduced To | 9.6 |
| Total Early Payment | 47,50,000 |
| Total Interest | 43,20,065 |
| Interest saved with Prepayment | 57,54,497 |
The benefits of regularly pre-paying your home loan can clearly be seen in the above example. It doesn’t matter if it is a small or more significant amount. Prepayment is going to be helpful.
Choosing a higher Equated Monthly Instalment (EMI) is a strategic way to reduce both the interest outgo and the loan tenure. This method is particularly effective when your income increases—either through a salary hike or a job change.
After a salary increment or promotion
When your monthly budget allows for flexibility
If you aim to become debt-free sooner and save on interest payments
Let’s compare two options:
(1) Investing surplus funds in a mutual fund SIP vs. (2) Increasing EMI and pre-paying the loan
Loan Amount: ₹42 lakhs
Interest Rate: 9.1%
Tenure: 20 years
Base EMI: ₹38,000
Surplus Available: ₹12,000/month
| Particulars | Amount |
|---|---|
| SIP Tenure | 12 years |
| Total Principal Invested | ₹17,28,000 |
| Estimated Investment Value | ₹33,17,000 |
| Post-tax Amount for Loan Closure | ₹31,68,000 |
| Loan Outstanding after 12 Years | ₹26,07,000 |
| Excess Funds After Loan Closure | ₹5,61,329 |
| Home Loan Tax Benefit | ₹7,20,493 |
| Total Interest Paid (Post-Tax Benefit) | ₹31,48,681 |
Result: Loan closed in ~12 years with an extra ₹5.61 lakhs in hand.
| Particulars | Amount |
|---|---|
| Loan Closure Time | 12 years |
| Total Interest Paid | ₹24,61,725 |
| Tax Benefit on Interest | ₹5,39,484 |
| Total Interest (Post-Tax Benefit) | ₹19,22,241 |
Result: Loan closed in 12 years with ₹12.26 lakhs less in post-tax interest outgo compared to Case 1.
While Case 1 provides surplus liquidity, Case 2 saves significantly more in interest—₹12.26 lakhs. Ultimately, choosing between investing surplus or increasing EMI depends on your financial goals and risk tolerance.
Remaining loan tenure
Surplus amount available for EMI or investment
Home loan interest rate
Expected returns on mutual funds or other investments
Loan ownership (individual or joint)
While pre-paying your home loan offers numerous benefits, it’s essential to evaluate several key factors before committing to this strategy.
Some banks or lenders impose penalties for early repayment of home loans, especially during the initial years of the tenure.
Tip: Review your loan agreement carefully to understand if any prepayment charges apply and how they might impact your savings.
Before you divert surplus funds toward prepayment, ensure that you have a sufficient emergency corpus.
Why it matters: Having a financial cushion protects you against unexpected expenses, such as medical emergencies or job loss.
Do you have upcoming short-term financial needs (e.g., education fees, travel, or home renovations)?
Action: Prioritize saving for these goals first to prevent future cash flow issues.
Instead of pre-paying your loan, could your extra funds yield better returns elsewhere?
Analysis: Compare your loan interest rate with potential returns from investments like mutual funds, FDs, or stocks. Prepayment might not always be the most profitable option.
Regularly pre-paying your home loan can bring significant benefits, including reduced interest costs, faster debt freedom, and greater financial peace of mind. By carefully assessing your financial priorities and using smart prepayment strategies, you can make the most of your surplus funds and secure a more stable financial future.
Pro tip: These strategies can also apply to other debts like car loans or education loans.
