Buying a house is one of the biggest financial decisions for most Indians. A home loan helps make this dream possible, but it also comes with a long repayment journey. Most borrowers sign up for tenures as long as 15 to 20 years, and over this period, the interest paid often ends up being as much as, or even more than, the actual loan amount. That is why prepaying your loan – even in small amounts – can make a big difference.
Let’s break down a common dilemma: If you take a Rs 40 lakh home loan, will it be better to prepay Rs 50,000 every year, or double that and prepay Rs 1 lakh every year? The difference might surprise you, because choosing wisely can save you up to Rs 29 lakh in interest over time.
Understanding Home Loan Basics
When you take a home loan of Rs 40 lakh, the bank charges you an interest rate, say 9% per year. The repayment is structured as EMIs (Equated Monthly Instalments), which include both principal and interest. In the first few years, most of the EMI goes toward interest. Only later does the principal repayment portion increase.
This is why prepayment – paying extra money over and above your EMI – can be a game-changer. By reducing the outstanding principal early, you bring down the interest charged in the following months, leading to substantial savings.
Prepaying Rs 50,000 per year
Suppose you take a Rs 40 lakh loan at 9% interest for 20 years. Without any prepayment, your total repayment would be around Rs 86 lakh, which means interest outgo of nearly Rs 46 lakh.
Now, let’s say you decide to prepay Rs 50,000 every year. Here’s what happens:
- Each year, your outstanding principal reduces faster.
- Interest charged in subsequent years decreases.
- Your loan tenure comes down by a few years.
With this discipline, you can expect to save roughly Rs 14–15 lakh in interest over the full tenure. Your loan might end around 4 to 5 years earlier compared to the original schedule.
Prepaying Rs 1 lakh per year
Now let’s double the prepayment to Rs 1 lakh per year. The effect is even more dramatic.
- Principal reduces significantly faster.
- You cut down on a larger portion of interest in the early years.
- Loan closure happens around 7 to 8 years earlier than the scheduled tenure.
In this case, your savings shoot up to nearly Rs 29 lakh. Instead of paying Rs 86 lakh overall, you may end up paying just about Rs 57 lakh. That’s a life-changing difference.
Rs 50,000 vs Rs 1 lakh: The real impact
At first glance, doubling your prepayment from Rs 50,000 to Rs 1 lakh may seem like a small step. But in the long-term horizon of a 20-year loan, the compounding impact is huge. Here’s a simplified comparison:
| Scenario | EMI (approx) | Total repayment without prepayment | Total repayment with prepayment | Total savings |
|---|---|---|---|---|
| Rs 50,000 prepayment yearly | Rs 36,000 | Rs 86 lakh | Rs 72 lakh | Rs 14 lakh |
| Rs 1 lakh prepayment yearly | Rs 36,000 | Rs 86 lakh | Rs 57 lakh | Rs 29 lakh |
The jump from Rs 14 lakh savings to Rs 29 lakh savings happens because of how interest works. By aggressively reducing the outstanding principal early on, you stop interest from piling up. The sooner you bring down your loan balance, the higher your savings.
Why early prepayment matters more
The timing of prepayment plays a critical role. If you start prepaying in the first few years of your loan, the effect is far greater than doing so in the later years. That’s because:
- Early EMIs are interest-heavy.
- Extra payments in the initial phase directly reduce the base on which future interest is calculated.
- Even a small increase in prepayment in the early years compounds into massive savings over the full tenure.
So, if you have the financial flexibility, it’s better to make higher prepayments as early as possible.
Things to consider before prepaying
While prepayment is a smart move, you should keep a few things in mind:
- Check for prepayment charges
Most banks today don’t charge penalties on part-prepayments for floating-rate home loans. Still, confirm with your lender before making large prepayments. - Maintain emergency funds
Don’t exhaust all your savings just to prepay. Ensure you have at least 6 months of expenses in liquid savings for emergencies. - Compare with other investments
If your loan interest rate is 9% and you can earn 12–14% consistently through investments, it may be wiser to invest rather than prepay. But remember, guaranteed savings on a loan are risk-free, while market returns come with uncertainty. - Use bonuses and increments
Annual bonuses, salary hikes, or windfalls are perfect opportunities to make lump sum prepayments without disturbing your regular cash flow.
The psychological benefit
Beyond the financial math, prepayment also gives peace of mind. Imagine being debt-free 7–8 years earlier than planned. You save money, reduce stress, and free up cash flow for other goals like children’s education, retirement planning, or buying another property.
Conclusion
A home loan of Rs 40 lakh at 9% interest can feel like a lifelong burden, but smart prepayment strategies can cut down years of repayment and lakhs in interest costs. While prepaying Rs 50,000 every year can save you around Rs 14 lakh, stepping it up to Rs 1 lakh annually can almost double your benefit, with savings of up to Rs 29 lakh.
If your finances allow, choosing the higher prepayment route is clearly the smarter option. The earlier you start, the more powerful the impact. After all, every rupee saved on interest is a rupee earned for your future.