You have spare money and a home loan. When you prepay, the bank asks: reduce the EMI, or keep the EMI and reduce the tenure? Here is what each choice is worth on a real example.
Example: ₹5 lakh prepaid in year 3
A ₹50 lakh loan at 8.5% for 20 years has an EMI of ₹43,391 and total interest of ₹54,13,879. You prepay ₹5 lakh after two years.
| Choice | EMI after | Loan ends after | Total interest | Interest saved |
|---|---|---|---|---|
| No prepayment | ₹43,391 | 20 years | ₹54,13,879 | – |
| Keep EMI, cut tenure | ₹43,391 | 16 years 3 months | ₹39,56,578 | ₹14,57,301 |
| Keep tenure, cut EMI | ₹38,864 | 20 years | ₹49,35,985 | ₹4,77,894 |
Which should you pick?
- Cut the tenure if your income is stable. It saves roughly ₹9,79,407 more interest in this example, because the balance falls faster.
- Cut the EMI if your job is uncertain or other expenses are rising. A lower fixed outgo gives you room to breathe, and you can still prepay later.
- Either way, the earlier you prepay, the more you save. Prepayments in the first five years do the most work.
Before you prepay
- Keep an emergency fund of at least 6 months of expenses.
- In the old regime, home loan interest up to ₹2 lakh a year is deductible, so the effective rate is lower if you are in the 30% slab. In the new regime there is no such benefit, which makes prepaying more attractive.
- Floating-rate loans to individuals carry no prepayment charge.
Try your own loan in the home loan EMI calculator under “Prepayment”.
Questions people ask
Does prepayment reduce EMI or tenure by default?
Most banks reduce the tenure unless you ask for a lower EMI in writing.