Is prepaying a loan worth it?
In the early years of a loan, most of each EMI goes towards interest. A prepayment reduces the outstanding principal directly, so all future interest on that amount is saved. The earlier you prepay, the bigger the saving.
Reduce tenure or reduce EMI?
Reducing tenure keeps your EMI the same and closes the loan sooner — it saves the most interest. Reducing EMI lowers your monthly outflow but saves less overall. Choose reduce-EMI only if you need the monthly cash flow.
Things to check
- Banks cannot charge prepayment penalties on floating-rate home loans taken by individuals. Fixed-rate loans may carry a charge.
- Keep an emergency fund before prepaying.
- If your investments reliably earn more (after tax) than your loan rate, investing may be better than prepaying. Home loan interest also gives tax benefits under the old regime.