The set-up
A ₹50 lakh home loan for 20 years, and ₹10,000 a month of spare money. Path A puts the ₹10,000 toward the loan every month; once the loan closes early, the full EMI plus the ₹10,000 goes into a SIP until year 20. Path B pays the normal EMI and puts the ₹10,000 into a SIP from day one. Both paths spend exactly the same money every month. At 8.5%, the EMI is ₹43,391, and prepaying closes the loan after 12 years 11 months instead of 20 years.
| Loan rate | SIP return 8% | SIP return 10% | SIP return 12% |
|---|---|---|---|
| 7.5% | Invest ₹1.1 lakh | Invest ₹11.9 lakh | Invest ₹26.9 lakh |
| 8.5% | Prepay ₹3.9 lakh | Invest ₹6.5 lakh | Invest ₹20.9 lakh |
| 9.5% | Prepay ₹9.4 lakh | Invest ₹0.4 lakh | Invest ₹14.3 lakh |
| 10.5% | Prepay ₹15.5 lakh | Prepay ₹6.2 lakh | Invest ₹7 lakh |
Each cell shows which path leaves you with more wealth after 20 years, and by how much. Before tax, with steady returns, computed with the same method as our prepay or invest calculator.
Reading the table
- When the expected return is clearly above the loan rate, investing wins, and the gap grows with time because the SIP compounds for the full 20 years. At 8.5% with a 12% return, investing ends about ₹20.9 lakh ahead.
- When the two are close, the difference is small either way. At 8.5% and a 10% return, the gap is ₹6.5 lakh over 20 years, which a single bad market year could erase.
- Prepaying is guaranteed; investing is not. A 12% equity return is a long-run hope, not a promise. The prepay column is certain.
What the table leaves out
Tax cuts both ways. Under the old regime, home-loan interest up to ₹2 lakh a year is deductible, which lowers the real cost of the loan and favours investing. Equity gains above ₹1.25 lakh a year are taxed at 12.5% on sale, which trims the investing path. And there's a benefit no spreadsheet captures: being debt-free years earlier gives you options, such as a career change or a lower-paid job you love, that a larger portfolio with a loan still running doesn't.
A practical middle path
Many borrowers split the difference: prepay a fixed amount each year (a bonus, say) and SIP the rest. If your loan rate is above 9.5% or you'd sleep better without debt, lean toward prepaying. If your rate is low and you have a long horizon with a steady income, lean toward investing. Run your own loan in the prepay or invest calculator and the loan prepayment calculator.