Prepaying ₹5 lakh after year 2 of a ₹50 lakh, 8.5%, 20-year loan saves about ₹14.57 lakh of interest if you keep the EMI, and about ₹4.78 lakh if you cut it. Keeping the EMI also ends the loan 3 years 9 months sooner.
What this calculates
Enter your loan, the interest rate and tenure, then a one-time or yearly prepayment and the year it is made. This works out the interest you save and compares the two ways of using the prepayment: keeping your EMI so the loan ends sooner, or lowering the EMI and keeping the end date. A table and chart show the balance you owe year by year in each case.
The formula
EMI
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)Each month
interest = balance × r; principal repaid = EMI − interestAfter a prepayment
balance = balance − prepaymentr is the monthly rate (the yearly rate ÷ 12 ÷ 100) and n the number of months. If you reduce the tenure the EMI stays the same and the loan ends when the balance reaches zero. If you reduce the EMI it is worked out again on the new balance and the months that remain.
Worked example
Prepaying ₹1 lakh every year from year 1 on the same loan ends it after 14 years, saving about ₹18.55 lakh if you keep the EMI.
When to use it, and the mistakes to avoid
Use it to decide whether to put a bonus or savings into the loan, to compare that with investing, or to choose between a lower EMI and an earlier finish.
The mistakes that cost the most:
- Waiting. The saving is largest in the first years, when most of the EMI is interest.
- Choosing a lower EMI and then not using the cash flow well. You save far less interest.
- Forgetting charges. Fixed-rate loans and some lenders charge for prepayment.
- Ignoring other uses of the money. An emergency fund or higher-interest debt may come first.
- Assuming the rate stays put. Floating-rate loans change; the result changes with them.
FAQ
Should I reduce my EMI or my tenure after a prepayment?
Reducing the tenure saves more interest, because you keep paying the same EMI and so clear principal faster. Reducing the EMI eases your monthly budget but leaves the loan running for the full term. Pick the tenure if you can afford the EMI, the EMI if you need the cash flow.
How much interest will a prepayment save?
It depends on the amount, the rate and above all when you make it. For a ₹50 lakh loan at 8.5% over 20 years, ₹5 lakh prepaid after year 2 saves about ₹14.57 lakh if you keep the EMI and about ₹4.78 lakh if you cut it.
Is it better to prepay early or late in the loan?
Early. In the first years most of each EMI is interest, so a prepayment removes principal that would have charged interest for the longest. The same amount prepaid in year 12 saves much less.
Does my bank charge for prepayment?
For floating-rate home loans taken by individuals, banks generally cannot charge a prepayment penalty, but fixed-rate loans and loans from some lenders may. Some lenders also set a minimum amount or a limit on how often. Check your loan agreement before you prepay.
Will prepaying affect my tax deduction?
Yes: the interest you pay is lower, so the home loan interest you can claim is lower too. The calculator does not model tax; compare the interest saved against what you would earn if you invested the money instead.