Home Loan Prepayment vs Investment Calculator

Why most answers to this question are wrong

The usual comparison is “loan rate 8.5% versus expected return 12%, therefore invest.” That’s directionally right and structurally incomplete, because it ignores what happens after the loan is gone. Prepaying doesn’t just save interest — it frees the entire EMI years early, and that freed EMI then compounds for the remaining term. Any comparison that stops at “interest saved” understates prepayment badly.

This calculator runs both paths to the same finishing line: the loan’s original maturity date. On that date, in both scenarios, you own the house outright and hold a portfolio. The only question is which portfolio is larger.

The crossover sits near your loan rate

Move the return slider slowly and watch the verdict change. Somewhere close to your loan’s interest rate, the two paths converge — and the reason is intuitive once you see it. Prepaying earns you a guaranteed, tax-free return equal to your loan rate. Investing earns an uncertain, taxable return. So the investment has to beat the loan rate by enough to compensate for both the uncertainty and the tax before it’s genuinely the better choice.

That’s why “invest, obviously” is bad advice at a 9.5% loan rate and reasonable advice at 7%. The gap, not the direction, is what decides it.

What the numbers can’t tell you

• Prepaying is certain; investing isn’t. The 12% is an assumption. The 8.5% saved is contractual. A model that treats them as equivalent is flattering the investment.
• Tax cuts both ways. Equity gains are taxable above the annual exemption, which trims Option B. Home loan interest may be deductible depending on your regime, which trims the benefit of prepaying. Neither is modelled here — check your own position.
• Floating rates move. Your 8.5% is not fixed for twenty years. If rates rise, prepayment quietly becomes the better decision after the fact.
• Liquidity matters. Money in a fund can be reached in days. Money paid into a house cannot, without a fresh loan.
• Sleep is worth something. Some people carry debt comfortably and some don’t, and that’s a real input even though no calculator has a field for it.

Common questions

Is there a prepayment penalty?

Not on floating-rate home loans taken by individuals — the RBI bars lenders from charging one. Fixed-rate loans and some other loan types can carry a charge, so confirm before making a large payment.

Should I reduce the EMI or the tenure?

Tenure, almost always. Keeping the EMI and shortening the term is what produces the interest saving; lowering the EMI while keeping the term gives most of the benefit straight back to the lender.

Can I do both?

Yes, and for most people splitting the spare amount is the sensible answer. You capture some guaranteed saving, keep some liquidity and some upside, and avoid betting everything on one assumption about the next twenty years.

होम लोन चुकाएँ या निवेश करें?

अगर आपकी लोन दर 9% से ऊपर है, तो प्री-पेमेंट आम तौर पर बेहतर रहता है — क्योंकि वहाँ मिलने वाली बचत निश्चित और कर-मुक्त होती है। अगर दर 7% के आसपास है और आपकी अवधि लंबी है, तो इक्विटी में निवेश आगे निकल सकता है। ऊपर दिए गए कैलकुलेटर में अपनी असली दरें डालकर देखें — अनुमान लगाने से बेहतर है गणना कर लेना।