Prepaying your home loan

A home loan front-loads its interest. In the early years most of each EMI goes to the bank as interest, and only a small part repays what you borrowed. That is why a prepayment does so much, and an early one most of all: every rupee of principal you clear stops attracting interest for every month the loan has left to run.

This guide works it through on the same loan as our home-loan guide: ₹75 lakh at 8.5% over 20 years, with an EMI of ₹65,087. Left alone, that loan costs ₹81.21 lakh in interest, and you repay ₹1.56 Cr in all. Below: how much a prepayment saves, whether to take the saving as a lower EMI or a shorter loan, when to prepay and when not to, the RBI rules that mean a bank cannot charge you for it, and how to close the loan cleanly at the end.

Why prepaying saves so much

Each month the bank charges interest on what you still owe, and your EMI pays that interest first. Only what is left over reduces the loan. On the worked example, the first year’s EMIs come to ₹7.81 lakh, and 81% of that is interest: ₹6.32 lakh. Not until year 12 does more of each EMI go to principal than to interest, and the halfway point, where you have repaid half of what you borrowed, comes only in year 14.

A prepayment goes straight to principal. None of it is interest, and the interest it would have attracted over the rest of the loan never arises. That is the whole case for prepaying. It is also why two decisions matter so much: how you take the saving, and when you make the payment.

Cut the tenure or the EMI?

When you prepay, the loan can go one of two ways. The bank can keep your EMI where it is, so the loan ends sooner, or keep the end date where it is, so the EMI falls. The same ₹5 lakh, paid after three years, gives quite different results.

Keeping the EMI and shortening the loan saves ₹9.59 lakh more. You go on paying the higher amount, which clears the balance faster, and every month cut from the end of the loan is a month of interest you never pay. Lowering the EMI saves less, but it eases your monthly budget straight away, and that can be worth more if money is tight, if a second income is about to stop for a while, or if you would rather keep the extra cash each month as a cushion.

There is a middle course. Take the lower EMI, then keep paying the old amount anyway, as a regular part-prepayment when you can. You get close to the saving of the shorter loan while keeping the right to fall back to the lower EMI in a bad month. Whichever you choose, tell your lender in writing when you prepay, and check the revised repayment schedule it sends back: the new EMI, or the new end date, should be on it.

Early money works hardest

Early in the loan the balance is at its largest and has the longest to run, so a rupee of principal cleared then avoids the most interest. Late in the loan there is little interest left to avoid. The same ₹5 lakh saves ₹17.19 lakh if you prepay it after one year, and ₹2.36 lakh if you wait until after fifteen years.

So if you are going to prepay, and a bonus, the sale of an old flat or a maturing investment is coming, sooner beats later. The one exception is the money you need to keep liquid, which the section on when not to prepay covers below.

Four ways to prepay

A prepayment need not be one large cheque. Two habits do the same job gradually, and suit people whose savings come in monthly rather than as lump sums.

• One extra EMI a year. Put aside ₹5,424 a month, a twelfth of the EMI, and pay it into the loan at the end of each year.
• Raise what you pay as your income rises. Pay 5% more each year than the year before, either by asking your lender to raise the EMI or by prepaying the difference yourself.

The four don’t ask for the same money, so compare what each costs you as well as what it saves. The extra EMI a year puts ₹10.41 lakh into the loan over its life and ends it 3 years 3 months early. The rising EMI saves the most here, and ends the loan 7 years 9 months early, but only because you pay much more each month as the years go on: by the last year the EMI would be ₹1.17 lakh. It works only if your income keeps pace. If it doesn’t, the extra EMI a year is the gentler habit, and you can stop it in any year without asking anyone.

What RBI’s rules say

On a floating-rate home loan from a bank, prepaying costs you nothing. RBI’s directions bar banks from charging for it on floating-rate loans to individuals for any purpose other than business, whether you prepay part of the loan or all of it. For loans sanctioned before 31 December 2025 the rule is in paragraph 352. For loans sanctioned or renewed from 1 January 2026 it is in paragraph 353, which adds that it applies whatever the source of the money and with no minimum lock-in period.

The same paragraph requires the sanction letter and the loan agreement, and the Key Facts Statement where one is given, to say whether any prepayment charge applies at all, and bars a bank from charging one it has not disclosed there. That matters for a fixed-rate loan, which is where a charge can still apply: read the sanction letter before you sign, not when you come to prepay.

Housing finance companies have a parallel rule. One may not charge a prepayment levy on a floating-rate housing loan closed from any source, or on a fixed-rate one closed from your own money rather than a fresh loan from another lender.

Because a floating-rate loan carries no prepayment charge, you can also clear it with a cheaper loan from another lender, a balance transfer. Our guide to how home-loan rates work sets out what a transfer costs and when it pays.

When not to prepay

Prepaying is a guaranteed saving at your loan’s interest rate, but money paid into a home loan is hard to get back out. Hold off in these cases.

• You have no emergency fund. Keep enough in savings to cover several months of EMIs and living costs first. A lender will still want its EMI in a month when you lose your job; the money you prepaid won’t pay it.
• You have costlier debt. Clear any loan or card balance charging more than your home loan before you put a rupee into the home loan.
• You will need the money soon. If the cash is meant for the next stage payment on a flat, stamp duty, interiors or school fees, keep it where you can reach it.
• You claim a tax deduction on the interest. A prepayment cuts the interest you pay, and so the interest you can deduct. Weigh the tax you would give up against the interest you save; our guide to home loan tax benefits shows when the deduction is capped anyway. A chartered accountant can work it out for your slab and regime.
• You would rather invest. Prepaying earns you, in effect, your loan rate, with no risk. An investment may earn more or less than that after tax. That is a judgement about risk, not arithmetic, and it is yours to make.

If the flat is still being built and you are paying pre-EMI, a prepayment works the same way: it cuts the balance the bank charges interest on, so it cuts the pre-EMI too. But check first that you will still have the cash for the stage payments that are your share, since the bank pays only its part of each stage.

How to make a prepayment

1. Check the terms. Look at the sanction letter and Key Facts Statement for the loan type (floating or fixed) and for any charge or minimum amount. On a bank’s floating-rate loan to you as an individual, there should be no charge.
2. Ask how your lender accepts part-prepayments: online, by cheque or transfer at the branch, and from which date the payment counts.
3. Say what you want in writing: a shorter loan with the same EMI, or a lower EMI with the same end date.
4. Keep the receipt and the revised schedule, and check your next statement shows the lower balance.

Closing the loan for good

The last payment is not quite the end. RBI sets out what a bank owes you once a loan is fully repaid, and it is worth knowing, because the original documents of your flat are in the bank’s safe until then.

Before you prepay

• Keep an emergency fund of several months’ EMIs and living costs outside the loan.
• Clear costlier debt first, then the home loan.
• Check the sanction letter and Key Facts Statement for the loan type and any charge.
• Choose a shorter loan or a lower EMI, and tell the lender in writing.
• Prepay early when you can: the same amount saves far more in the first years.
• Keep every receipt and revised schedule, and check the next statement.
• On closure, collect the originals within 30 days and check the charge is removed.