The first part of this piece ended on an open question, and several readers asked it straight away: fine, but what if Ajay and Neha had simply put that spare ₹5,000 into the loan instead of investing it?
A quick recap. They borrowed ₹50 lakh at 9% over twenty years. The EMI came to about ₹45,000 a month; they had budgeted ₹50,000. In part one they invested the ₹5,000 difference, and under an assumed 13% a year it grew to roughly ₹58 lakh over twenty years — close to the ₹58 lakh of interest the loan cost them. That 13% was an assumption used to draw the illustration, not something anybody was promised.
The prepayment route, run as an illustration
Now run the other version. They pay ₹50,000 every month instead of ₹45,000, with the extra ₹5,000 going straight against the principal.
The loan closes in about fifteen and a half years rather than twenty. From that point there is no EMI at all, so the full ₹50,000 a month is free. Invest that for the remaining four and a half years and — on the same assumed 13%, purely as an illustration — it comes to roughly ₹37 lakh.
One deduction to make from that. While a home loan is running, the interest has historically attracted a tax deduction in India, and closing early gives that up for the years you would otherwise still have been paying. In the last four and a half years of the original schedule the interest came to around ₹4.4 lakh, so the relief forgone is roughly ₹87,000 at a 20% marginal rate, or about ₹1.31 lakh at 30%.
Net, then: about ₹36 lakh on the prepayment route, against about ₹58 lakh on the invest-the-difference route.
A necessary warning about the tax leg
Do not lift that tax calculation into your own spreadsheet. Whether a home-loan interest deduction is available to you at all depends on which tax regime you are taxed under, and the position has changed materially since this was written — India's default regime is no longer the one these older illustrations assumed, and deductions of this kind do not sit inside every regime. Treat the tax leg here as a mechanism, not as a statement of current rules, and check where you actually stand. Assuming a benefit you do not receive makes borrowing look cheaper than it is.
What the ₹22 lakh gap really is
The invest-the-difference route came out about ₹22 lakh ahead. It is tempting to read that as the answer. It is not.
That entire gap exists because we assumed a 13% return against a 9% cost of borrowing. The gap is the assumption. Assume a return below the loan's after-tax cost and prepayment wins instead, on exactly the same spreadsheet.
Which is the real point. You are not comparing two returns. You are comparing a certain, contracted cost against an uncertain, unpromised return.
Every rupee you prepay saves you the loan's rate with complete certainty. There is no market between you and that saving, no good year or bad year. It is the risk-free side of the trade, and its value is known the day you make the payment.
The invested rupee might beat the loan rate, or fall short. It is also judged on a single date — the day you finally need the money. A twenty-year corpus with a poor final two years is a smaller corpus, and no amount of good behaviour earlier repairs that. Interest already saved cannot be taken back by a bad quarter.
The part the spreadsheet cannot hold
The comparison also quietly assumes you invest ₹5,000 every month for twenty years and never touch it. Real households have weddings, medical bills and job gaps. A plan that only works if you never flinch is weaker than its arithmetic suggests.
And some people simply do not sleep well owing a bank ₹50 lakh. That is not an irrational preference to be argued away. If clearing the loan early is what lets you stop thinking about it, that peace has genuine value.
The principle underneath both parts
Prepaying makes arithmetic sense when what you would otherwise earn — after tax, and after honestly allowing for the risk you are taking — is lower than the loan's after-tax cost.
The catch is that for a market-linked investment nobody knows that number in advance. You only know it looking backwards. That uncertainty is not a footnote to the decision; it is the decision. Which way it goes for you depends on your loan's rate, your tax position, your job security and how you actually behave in a bad year.
This article is general information for education only. It is not investment advice and does not take account of your circumstances. Investments in securities are subject to market risks; please read all related documents carefully before investing.
