An example
You owe ₹30 lakh at 8.5% with 18 years left, so the EMI is ₹27,164. You prepay ₹5 lakh from a bonus.
- Keep the EMI, cut the tenure: the loan ends 5 years 6 months early and you save about ₹13,06,087 of interest.
- Keep the tenure, cut the EMI: the EMI falls to ₹22,636 and you save about ₹4,77,894.
Cutting the tenure nearly always saves more, because the loan keeps shrinking at the old, higher EMI. Cut the EMI instead when your monthly budget is tight or your income is uncertain.
When prepaying is worth it
- Early in the loan: in the first years most of the EMI is interest, so each rupee prepaid saves the most.
- After an emergency fund: keep 6 months of expenses aside before prepaying.
- Versus investing: prepaying an 8.5% loan is a guaranteed 8.5% return. In the old tax regime, interest up to ₹2 lakh a year on a self-occupied home is deductible, which lowers the real cost of the loan.
Charges
RBI does not allow banks and housing finance companies to charge a prepayment or foreclosure fee on floating-rate loans to individuals. Fixed-rate loans may carry a fee of 2–4%; check your loan agreement.
Read more in our guide: Prepay your home loan: reduce EMI or tenure?
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Questions people ask
Is it better to reduce EMI or tenure on prepayment?
Reducing tenure saves more interest. Reducing EMI gives you more cash each month. If you can afford the current EMI, keep it and cut the tenure.
How much can I prepay at a time?
Many banks set a minimum, often one EMI or a fixed amount, and some limit the number of part-payments a year. There is no upper limit; you can close the loan.
Does prepayment affect my tax benefit?
Only in the old regime, where a smaller loan means less interest to claim under the home loan deduction. The interest saved is usually much larger than the tax benefit lost.