Who This Scenario Is For
If you have a home loan and receive annual bonuses, salary hikes, or have surplus savings, prepaying your loan is one of the smartest financial moves you can make. Even modest prepayments can save lakhs in interest and help you become debt-free years earlier.
This scenario shows you what happens when you prepay ₹1 lakh every year on a 50 lakh home loan. The numbers are real and the savings are significant.
Bottom line: By prepaying ₹1 lakh annually, you can save approximately ₹18.5 lakh in interest and close your loan 6 years earlier.
The Loan Setup
| Loan Amount | ₹50,00,000 |
| Interest Rate | 8.5% per annum |
| Original Tenure | 20 years |
| Monthly EMI | ₹43,391 |
| Annual Prepayment | ₹1,00,000 every year |
With vs Without Prepayment - The Complete Picture
| Parameter | Without Prepayment | With ₹1L Annual Prepayment | Benefit |
|---|---|---|---|
| Loan Tenure | 20 years (240 months) | 14 years (168 months) | 6 years saved |
| Total EMI Paid | ₹1,04,13,840 | ₹72,89,688 | |
| Total Prepayment | ₹0 | ₹14,00,000 | |
| Total Amount Paid | ₹1,04,13,840 | ₹86,89,688 | |
| Total Interest Paid | ₹54,13,840 | ₹36,89,688 | ₹17,24,152 saved |
| Net Savings | ₹17,24,152 |
By prepaying just ₹1 lakh annually (₹8,333/month), you save ₹17.24 lakh in interest and close your loan 6 years earlier. That's a 32% reduction in interest!
Year-by-Year Impact of Prepayment
Here's how prepayment affects your loan balance and interest over time:
| Year | Balance (No Prepay) | Balance (With Prepay) | Difference |
|---|---|---|---|
| Year 1 | ₹49,01,500 | ₹48,01,500 | ₹1,00,000 |
| Year 3 | ₹46,15,800 | ₹42,89,200 | ₹3,26,600 |
| Year 5 | ₹42,42,500 | ₹36,78,300 | ₹5,64,200 |
| Year 10 | ₹32,18,600 | ₹19,45,800 | ₹12,72,800 |
| Year 14 | ₹21,15,400 | ₹0 (Loan Closed) | Debt Free! |
| Year 20 | ₹0 (Loan Closed) | — |
Impact of Different Prepayment Amounts
See how much you can save with different annual prepayment amounts:
| Annual Prepayment | New Tenure | Interest Saved | Time Saved |
|---|---|---|---|
| No Prepayment | 20 years | — | — |
| ₹50,000/year | 16.5 years | ₹9,85,000 | 3.5 years |
| ₹1,00,000/year | 14 years | ₹17,24,152 | 6 years |
| ₹1,50,000/year | 12 years | ₹23,18,000 | 8 years |
| ₹2,00,000/year | 10.5 years | ₹27,95,000 | 9.5 years |
Understanding How Prepayment Works
Why Prepayment Saves So Much Money
When you prepay, that amount goes entirely toward reducing your principal. This immediately reduces the outstanding balance on which future interest is calculated. Since interest is charged on the remaining principal, every rupee of prepayment saves you multiple rupees in future interest.
In a 20-year loan at 8.5%, every ₹1 lakh prepaid in year 1 saves you approximately ₹1.85 lakh in total interest over the loan life. The earlier you prepay, the more you save.
Two Options After Prepayment
Option 1: Reduce Tenure (Keep Same EMI)
This is what we've shown in this scenario. Your EMI stays at ₹43,391, but the loan closes earlier. Most people choose this because it keeps monthly budget predictable while getting out of debt faster.
Option 2: Reduce EMI (Keep Same Tenure)
After ₹1 lakh prepayment in year 1, you could reduce your EMI to approximately ₹42,800 for the remaining 19 years instead. This gives immediate monthly relief but saves less interest overall.
When to Prepay
Prepayment makes the most sense when:
- You receive annual bonuses or increments
- Your emergency fund is already in place (6 months expenses)
- You have no other high-interest debts (credit cards, personal loans)
- Your home loan interest rate is higher than returns from fixed deposits
- You're in early or middle years of the loan (first 10 years)
Tax Implications
Prepayment reduces your principal faster, which means you'll pay less interest in future years. Since home loan interest (up to ₹2 lakh annually) is tax deductible under Section 24(b), aggressive prepayment might reduce your future tax deductions.
However, the interest savings from prepayment almost always outweigh the loss of tax deduction, especially if you're in lower tax brackets.
Prepayment Rules in India
- All banks allow partial prepayment on floating rate home loans without penalty
- For fixed rate loans, some banks charge 2-4% prepayment penalty
- Minimum prepayment amount varies (typically ₹5,000 to ₹25,000)
- You can prepay as often as you want (monthly, quarterly, or annually)
- Online prepayment is available with most banks
Calculate Your Prepayment Impact
Every loan is different. Use our EMI calculator to see how much you'll save with your specific prepayment plan.
Use EMI CalculatorFrequently Asked Questions
Should I prepay my home loan or invest in mutual funds?
If your home loan interest rate is 8.5%, prepayment gives you a guaranteed 8.5% return. Equity mutual funds may give 12-15% long term, but with risk. Generally, prepay if you want guaranteed savings and are risk-averse. Invest if you have a long horizon and can handle volatility.
Is there a penalty for prepaying home loans in India?
For floating rate home loans, RBI rules prohibit banks from charging prepayment penalties. For fixed rate loans, banks can charge 2-4% penalty. Most Indian home loans are floating rate, so prepayment is penalty-free.
Should I prepay in small amounts monthly or in one lump sum annually?
Mathematically, monthly prepayments save slightly more because principal reduces faster. But practically, annual lump sum (from bonus) is easier to manage. The difference is minimal — choose what fits your cash flow.
What if I need that prepayment money later?
Once you prepay, you cannot get that money back unless you take a new loan. Always keep 6 months emergency fund before prepaying. Don't prepay if you might need the money within 2-3 years.
Is prepayment worth it in the last few years of the loan?
In later years, most of your EMI goes toward principal anyway, so prepayment saves less interest. It's most effective in the first 10 years when interest component is high. After year 15, the benefit is minimal.
Can I prepay and also claim full tax deduction?
You can claim deduction on actual interest paid each year (up to ₹2 lakh). If prepayment reduces your annual interest below ₹2 lakh, you'll claim less deduction. But you're still saving more than the lost tax benefit.
How do I actually prepay my home loan?
Most banks offer online prepayment through net banking. Alternatively, visit your branch with your loan account number. The prepayment is processed immediately and your loan balance reduces the same day.