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🏡 Home Loan Prepayment
Savings from lump-sum prepayment: reduced tenure or lower EMI

A Home Loan Prepayment of ₹40,00,000 for 15 years at 8.5% is ₹10.36 L.

Formula

Interest Saved = Original Total Interest − Total Interest after Prepayment, where the post-prepayment schedule recomputes EMI/tenure on the reduced outstanding principal

Worked example
InputValue
Outstanding Loan Balance₹40,00,000
Annual Interest Rate8.5%
Remaining Tenure15 yr
Prepayment Amount₹5,00,000
Use Prepayment toReduce Tenure (keep same EMI)
Interest Saved₹10,36,194
Tenure Saved3.3 yr
New EMI / Month₹39,390
Original EMI₹39,390
New Remaining Tenure11.8 yr
Original Total Interest₹30,90,125
New Total Interest₹20,53,931

How prepayment savings are calculated

A lump-sum prepayment goes 100% against your principal — and since interest accrues on the outstanding principal every month, killing principal early erases all the futureA binding agreement to buy or sell at a set price on a future date. interest that money would have generated. The calculator shows the two ways to bank that saving: keep the EMI and shorten the tenure (maximum interest saved), or keep the tenure and lower the EMI (monthly relief).

Timing is nearly everything: the same prepayment saves several times more in year 2 than in year 15, because early in the amortisationPaying off a loan through scheduled EMIs over time. schedule almost the entire EMI is interest — the outstanding principal barely moves for years. So the classic move — ₹5 lakh prepaid in year 2 of a 20-year loan — routinely saves ₹10-12 lakh of interest and 3-4 years of EMIs, while the identical ₹5 lakh in year 15 saves a fraction of that. If you ever plan to prepay, plan to prepay early.
Example₹50 lakh outstanding at 8.5% with 18 years left (EMI ≈ ₹45,000): a ₹5 lakh prepayment with tenure-reduction saves roughly ₹11 lakh in interest and cuts ~3 years of payments. The same ₹5 lakh with EMI-reduction drops the EMI by ~₹4,500/month but saves only ~₹4.7 lakh of interest — tenure-reduction is almost always the wealth-maximising choice if you can keep affording the old EMI.
Common mistakeDraining the emergency fundAccessible cash set aside for unexpected expenses. (or pausing equityA unit of ownership in a company. SIPs earning a likely 11-13%) to prepay an 8.5% loan. Prepayment is a guaranteed 8.5% return — excellent, but it ranks after the emergency buffer, after clearing any high-interest debt, and it competes with (doesn’t automatically beat) long-horizon equityA unit of ownership in a company.. Floating-rate home loans have no prepayment penalty; fixed-rate ones may — check before writing the cheque.
✓ You learnedPrepay early (that’s when interest density is highest), choose tenure-reduction over EMI-reduction if cash flow allows, and treat prepayment as a guaranteed ~loan-rate return that ranks after your emergency fundAccessible cash set aside for unexpected expenses. and above most debt investments — but not automatically above long-horizon equityA unit of ownership in a company..
FAQs
Reduce tenure or reduce EMI — which is better?

Tenure-reduction saves 2-3× more interest for the same prepayment, because it removes the most expensive (final) years of the loan entirely. Choose EMI-reduction only when monthly cash-flow relief is the actual goal — a squeezed budget, an income dip. Wealth-wise, keep paying the EMI you’ve already absorbed and let the loan end years sooner.

Is there a penalty for prepaying a home loan?

On floating-rate home loans to individuals, RBI rules prohibit prepayment/foreclosure charges — you can prepay any amount, any time, free. Fixed-rate loans (and some non-individual/NBFC arrangements) may still carry a 2-4% charge; check your sanction letter. Many lenders also set a small minimum (often one EMI’s worth) per prepayment.