Prepay Home Loan or Invest?

Published: June 2, 2014 at 5:54 pm

Last Updated on August 30, 2021 at 3:44 pm

As someone who knows very little about home loans, the popularity of the titular question never fails to surprise me.

When this question was asked again in the facebook group, Asan Ideas for Wealth (AIFW), I learnt something new. Here is an account of my understanding. I thank the members of AIFW for their insight.

Sometime back, on Subras request, I made a prepay home loan or invest for retirement calculator and realised that unless one wishes to retire early, there is no flaming hurry to pre-close a loan.

First let look at this issue from both angles

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Invest and let the loan run its course 

  1. After all, salaries will increase and inflation, which is comparable to home loan rate, will slowly, but surely diminish the value of the EMI.
  2. There are more obvious incentives to continue the loan. Even if there is no tax benefit from the principal component, since 80C is maxed out for most, the interest component is eligible for a decent tax deduction. The tax save can make a difference if invested
  3. Since the interest component is high for the first half of the loan duration, it makes sense to let the loan run at least for half the stipulated period and then pre-pay it.
  4. Investing now will maximize the effect of compounding. What if you cannot build a large enough corpus for retirement or fund other goals?

 Notice that all arguments are mathematical in nature.

Prepay, close out the loan asap and then invest

  1. Why be in debt? Feels like a sword hanging over the neck. I can’t think clearly. My parents are urging me to get out asap.
  2. Why not actually own the home asap and then invest?
  3. What if interest rates increase? I have a high enough emi as it is!

 Is the 3rd argument the only mathematical one?

Let us now look at an imaginary but typical scenario.

  • Akash is a 30 year old, married and with a 2 year old daughter.
  • Gross annual income ~ 15.4 Lakhs. Annual growth 10%
  • Monthly expenses ~ Rs. 40,000; Inflation 8%
  • Home loan (self-occupied): 60 Lakhs; Rate: 10%; Tenure 20 year; EMI: Rs. 57,901;
  • Retirement 30 years away
  • Daughter education 16 years away
  • Daughters marriage 23 years away
  • Section 80C limit: 1 Lakh  (home loan principle is assumed to be not part of deduction)
  • Section 24(b) limit (home loan interest deduction): Rs. 1, 50,000

Akash has now obtained a lump sum of Rs. 3 lakh. Should he invest it or use it for pre-paying?

For both scenarios, we assume that

  • Akash invests his salary after accounting for expenses, EMI, 80C deductions, tax. The tax saved from section 24(b) is also invested.
  • Akash continues such investing after the end of the loan up to retirement
  • The investment is assumed to grow each year at the average rate of 10% and when the need arises –daughters education 16 years later; wedding 23 years later – redemptions are made from the same account.
  • Only long term goals are considered.

Which is better? Investing or prepaying?

Have a look and judge for yourselves. I am automating this Excel sheet so that inputs can be varied at will.



If the lump sum was pre-paid, Aksash will fall short of the corpus required for financial independence. Please don’t argue, not by much! Remember the numbers used here are imaginary. Until you punch in your own numbers, you will not know for sure.

Had he invested the lump sum, he would have got a corpus much higher than that required.

Had Akash, postponed the purchased of the house, would have done much better? Perhaps – shall include this option in the calculator to find out.

So which is better?

If we look only at the graph, Investing the lump sum is better.

Not because he will fall short of the retirement corpus needed, but because it is not practical to assume that future cash inflows will be used for investing! We cannot be so sure about the future.

When you have money, invest – right now! Do not assume you will invest from your higher salary 5 years later. That may happen may not happen. Investing now, will get time on your side.

 Prepaying is not terrible!

Frequent prepaying makes sense only when the EMI is very large – more than 50% of net take-home pay.  In such a case the person will feel stifled and it makes sense to at least shorten the suffering. So pre-paying in chunks, every few months does have an appeal.

When our salary is accounted for completely by EMI, expenses and taxes, we cannot

So  even this suggestion is mathematical and not just governed by emotions. So even the sword above our neck feeling is grounded in math for those with high EMIs!

The point is, analyse your financial situation holistically before making a decision. There is no need to choose one or the other (investment or prepayment).

You can always follow the middle path – invest some, prepay some.

In any case, remember to consider all your goals in the analysis. Give me a few days to automate the analysis tool.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)