"An effective home loan prepayment strategy: Cutting down interest costs & shortening the repayment period."

• by Vaibhav
• Updated: June 30th, 2025

"While the new tax regime streamlines income tax filing and provides reduced tax rates, it eliminates many commonly claimed deductions. For home loan borrowers, this means losing the Rs. 2 lakh deduction on interest payments under Section 24(b) and the Rs. 1.5 lakh deduction on principal repayment—benefits that previously helped lower the overall borrowing cost."

Previously, tax deductions made it sensible to retain home loans, but with the new tax regime raising the effective cost, that rationale no longer holds. This shift presents a good opportunity to revisit your repayment plan and consider prepaying to minimize total interest payments.

Why prepaying works

Home loans are structured so that in the initial years, a major share of your EMI goes toward interest rather than the principal. By making prepayments, you reduce the outstanding principal, which in turn lowers future interest payments. Even small prepayments can significantly cut down both the total interest paid and the overall loan tenure.

Consider a typical Rs. 50 lakh home loan at 8.5% interest for 20 years. Over the loan term, you’d end up paying more than Rs. 48 lakh just in interest—nearly equal to the original loan amount. A single prepayment of Rs. 5 lakh in the third year could cut your loan tenure by 3 to 4 years and lower your interest outgo by Rs. 10–12 lakh, depending on your lender’s terms. The earlier you prepay, the greater the savings.

If a lump sum prepayment isn’t an option, gradually increasing your EMI each year as your income rises is a smart alternative. Boosting your EMI by 5–10% annually can offer comparable benefits in reducing both the interest paid and the loan duration.

How many EMI can you save by prepaying a loan?

If you borrow a loan of Rs.50 lakh for 20 years @8.5%, you will pay a total of 220 EMIs

For example, if you increase your EMI by 10% each year on a 20-year home loan, you could repay it in less than 10 years and slash your total interest outgo by around 45%. Even a modest 5% annual increase can shorten the loan term to 12–13 years. This gradual approach is ideal for younger borrowers who may not be able to opt for a shorter tenure upfront but still aim to become debt-free earlier.

The most impactful strategy combines periodic lump sum prepayments with annual EMI increases. This two-pronged method accelerates loan repayment and results in substantial interest savings. It allows you to potentially halve your loan tenure while keeping your lifestyle largely unaffected.

Utilize unattractive assets

Prepaying your home loan doesn’t have to mean major lifestyle cuts. You can begin by channeling windfalls—such as annual bonuses, maturing fixed deposits, insurance payouts, or proceeds from selling low-yield assets—towards your loan. Allocating a portion of your yearly raise or performance incentives can also help you build a solid prepayment fund over time.

Consistency is crucial

Setting a clear target—like prepaying 5% of the loan amount annually—can keep you disciplined and on track, without putting pressure on your finances. That said, prepaying in the initial years of the loan offers the most benefit, as this is when the interest component of your EMIs is highest. Reducing the principal early can lead to significant savings over the life of the loan.

As your loan matures, a larger portion of your EMI goes toward the principal, which means the benefits of prepayment diminish over time. For instance, if you're already in the 15th year of a 20-year loan, prepaying offers limited savings. In such cases, it may make more sense to continue with the loan—especially if the interest rate is low, say around 7.35%, or if you have alternative investments generating over 10% returns.

Still, given the unpredictability of financial markets, using surplus funds to prepay a home loan can often be the wiser choice. While market-linked investments may promise higher returns, they come with risk. In contrast, prepaying your loan provides guaranteed savings by lowering your interest outgo—offering a fixed, risk-free financial benefit.

“Prepaying your loan is essentially like earning a return equal to your loan’s interest rate. So, if your home loan rate is 8.5%, each rupee you prepay saves you from paying 8.5% interest—offering a risk-free return that’s better than what most safe investments currently provide.” Beyond the financial benefit, there’s also the emotional relief of becoming debt-free ahead of schedule.

Most banks now permit prepayments on floating-rate loans without penalties, but it's still wise to review the terms for any hidden fees or conditions. Also, ensure your financial basics are covered—don’t dip into your emergency fund or disrupt essential investments to prepay your loan. Having a solid financial cushion is key before diverting extra funds toward prepayment.