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Should you prepay your home loan? Key financial considerations for borrowers
Before prepaying a home loan, borrowers should compare the interest saved with potential investment returns. Focus on the loan’s rate and remaining tenure
Ananya Sharma, a 32-year-old IT professional in Pune, took a home loan of ₹60 lakh in 2018 to buy her first apartment. She opted for a 20-year tenure with an EMI of ₹48,000, ensuring it stayed within 35 per cent of her monthly income. Over time, as her salary increased, she began making partial prepayments of ₹2–3 lakh annually. By 2025, she had already prepaid ₹15 lakh, reducing her outstanding tenure by six years. Ananya’s disciplined EMI payments, combined with strategic prepayments, helped her save nearly ₹12 lakh in interest outgo.
But does prepaying a home loan make sense? What are the reasons to prepay a home loan and what should influence your decision? We take a look.
Why prepayment early in the loan tenure saves more interest
Borrowers must consider first the outstanding interest rate and term of the loan. “Prepayment at the start of the term saves significant interest but prepayment toward the end of the term only has a marginal impact. They must also compare the loan cost with returns from other investments that are available and weigh liquidity needs as well as overall financial goals,” says Pramod Kathuria, Founder and CEO, Easiloan, a digital home loans marketplace.
Payment early in the loan tenure will generally make a larger impact as the interest cost component of EMIs is higher in the first few years. Small prepayments in this phase dramatically reduce total interest and tenure. In later years, EMIs are largely principal repayment and so the impact of prepayment is less.
Using amortization schedules and EMI calculators for better decisions
A practical method is to approximate the total prepayment savings in interest and contrast it with probable returns from other investments during the corresponding time.
“Amortization schedules or EMI calculators may be used to get a visual representation of interest reduction, and it may then be balanced against probable growth of other investments, after taking into consideration risk and perceived liquidity,” says Kathuria.
Prepayment may make sense if interest savings beat investment returns.
The emergency fund and adequate insurance cover should be the immediate priorities before prepaying a loan, especially when the loan interest rate is not abnormally high.
“Retirement corpus building, while essential, can proceed gradually while maintaining financial resilience with a strong safety net once these fundamental protections are in place,” says Sanjeev Govila (Retd), Certified Financial Planner, CEO, Hum Fauji Initiatives, a financial advisory firm. This sequence helps avoid financial hardship and keeps long-term goals on track.
Interest deductions no longer a factor
Under the old tax regime, borrowers could claim deduction of up to ₹2 lakh per annum on interest paid on a self-occupied property loan under Section 24(b). “This benefit often motivated borrowers to continue with the loan tenure to maximize tax savings,” says Govila.
However, most Indian taxpayers now opt for the new tax regime, which offers lower slab rates but removes many deductions, including tax benefits on home loan interest (except for rented properties). Hence, for most taxpayers filing under the new regime, these interest tax benefits are not available and do not influence the prepayment decision.
“However, those who continue in the old regime or have rented properties should carefully calculate the net tax impact before closing the loan to avoid losing out on tax deductions,” says Govila.
Being debt-free brings peace of mind, which is valuable. At the same time, it’s important to maintain long-term wealth-building strategies through investments. “A balanced approach, continuing systematic investments while making occasional prepayments, can help borrowers reduce debt responsibly while staying on track with their financial goals,” says Kathuria.
Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics
