Prepay Home Loan vs Invest Calculator
The bank says prepay. The fund distributor says invest. Both are selling something. Here is the month-by-month math instead.
Verdict
Investing wins by $15.6K
- Your EMI
- $1,394
- Prepay path ends at
- $256.2K
- Invest path ends at
- $271.8K
- Loan cleared early
- 7 yr 2 mo
The prepay path invests the freed-up EMI after closure. Prepaying is the guaranteed-return option; investing depends on markets delivering.
Net wealth over the loan tenure
Year-by-year table
| Year | Prepay path | Invest path |
|---|---|---|
| 1 | -$143,592 | -$143,472 |
| 2 | -$126,084 | -$125,706 |
| 3 | -$107,405 | -$106,610 |
| 4 | -$87,474 | -$86,083 |
| 5 | -$66,208 | -$64,016 |
| 6 | -$43,518 | -$40,295 |
| 7 | -$19,309 | -$14,793 |
| 8 | $6,556 | $12,624 |
| 9 | $34,534 | $42,101 |
| 10 | $64,749 | $73,793 |
| 11 | $97,381 | $107,868 |
| 12 | $132,625 | $144,507 |
| 13 | $170,687 | $183,904 |
| 14 | $211,795 | $226,267 |
| 15 | $256,191 | $271,823 |
A race between two rates
Every salaried person with a home loan eventually faces this: an increment lands, and 20,000 rupees a month is suddenly free. The bank's answer is always prepay; the fund distributor's answer is always invest. Both have an incentive. The honest answer is a race between two rates: the loan rate you save, which is guaranteed, and the investment return you might earn, which is not.
This simulation is fair to both sides: the prepay path does not stop at loan closure but invests the full freed-up EMI for the remaining years, which is where naive comparisons usually cheat. Assumptions: EMI computed at the loan's nominal rate compounded monthly (home loans currently average around 8.5%), investment returns are effective annual compounded monthly, taxes not modelled.
FAQ
What's the quick rule for prepay vs invest?
Compare your loan rate with your realistic post-tax investment return. A loan at 8.5% versus equity at 12% favours investing; the same loan versus an FD at 7% favours prepaying. This calculator runs the full month-by-month simulation of both, including investing the freed-up EMI after an early loan closure.
Why do people prepay even when investing wins on paper?
Because prepayment is a guaranteed, risk-free return equal to your loan rate, while market returns are uncertain. A 12% expected return can be minus 20% in a bad year. Being debt-free also changes risk appetite. The spreadsheet answer and the sleep-well answer can differ; this tool gives you the spreadsheet one.
Does prepayment reduce my EMI or my tenure?
Banks offer both. Tenure reduction saves far more interest and is what this calculator models: same EMI, the loan just ends earlier, after which this model invests the entire freed-up EMI plus your extra amount.
What about the home loan tax deduction?
Under the old regime, interest up to 2 lakh a year is deductible, which effectively lowers your loan rate and tilts the answer toward investing. Under the new regime, which most taxpayers now use, there is no deduction for self-occupied property. Adjust the loan rate down 1 to 2% if you claim the old-regime deduction.
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