Prepayment vs Higher EMI: Which Saves More Interest?

You have some extra money—a bonus, inheritance, or savings. Should you make a lump sum prepayment on your home loan, or increase your monthly EMI? Both reduce your loan tenure and interest, but which is more effective?

Let's do the math.

Understanding the Two Strategies

Lump Sum Prepayment

A one-time payment that directly reduces your principal. Your EMI stays the same, but the loan tenure decreases.

Higher EMI

Increasing your monthly payment. Each EMI contains more principal repayment, reducing tenure gradually.

Head-to-Head Comparison

Scenario: ₹50 lakh home loan, 8.5% interest, 20-year tenure

Metric	Original Loan	With ₹5 L Prepayment	With ₹5,000 Higher EMI
EMI	₹43,391	₹43,391	₹48,391
Tenure	240 months	199 months	197 months
Total interest	₹54,13,840	₹41,30,247	₹40,29,977
Interest saved	-	₹12,83,593	₹13,83,863

Surprise: Higher EMI saves slightly more interest than the prepayment!

But wait—let's add timing to the analysis.

Calculate your savings: Use our EMI Calculator to see how prepayments affect your loan.

The Timing Factor

Prepayment Made in Year 1

Metric	₹5 L Prepayment (Year 1)	₹5 L Prepayment (Year 10)
Tenure reduction	41 months	26 months
Interest saved	₹12,83,593	₹5,21,847

Key insight: Early prepayment saves more because it reduces principal when interest burden is highest.

Higher EMI: Consistent Effect

Higher EMI works from day one, so timing isn't an issue—the benefit accrues automatically.

Which Strategy When?

Choose Lump Sum Prepayment If:

1. You receive irregular windfalls

   • Bonus, property sale, inheritance
   • One-time funds that won't repeat

2. You're in early years of loan

   • Maximum interest savings
   • Principal reduction has longest runway to compound

3. You can't commit to higher EMI

   • Income is variable
   • Job security concerns

4. Large amount available

   • Prepaying ₹5-10 L makes meaningful difference
   • Smaller amounts have less impact

Choose Higher EMI If:

1. You have stable, growing income

   • Salaried with regular increments
   • Can sustain higher EMI long-term

2. You want forced discipline

   • EMI is automatically deducted
   • No temptation to spend the "extra" money

3. Income just increased

   • Promotion, new job
   • Lifestyle inflation alternative

4. You can increase by 10%+ of current EMI

   • Meaningful acceleration
   • Small increases have limited impact

The Math: Detailed Scenarios

Scenario A: ₹50 L Loan, ₹10 L Extra Over 5 Years

Option 1: Annual Prepayments of ₹2 L

Year	Prepayment	Tenure After	Interest Saved
1	₹2,00,000	220 months	₹5,52,000
2	₹2,00,000	200 months	₹4,36,000
3	₹2,00,000	182 months	₹3,42,000
4	₹2,00,000	164 months	₹2,61,000
5	₹2,00,000	148 months	₹1,93,000
Total	₹10,00,000	148 months	₹17,84,000

Option 2: Higher EMI (₹16,667/month extra)

Metric	Value
New EMI	₹60,058
Original tenure	240 months
New tenure	142 months
Interest saved	₹19,21,000

Winner: Higher EMI saves ₹1,37,000 more.

Scenario B: Same ₹10 L, Lump Sum vs Spread

Option 1: ₹10 L Prepayment in Year 1

Metric	Value
Tenure reduction	68 months
New tenure	172 months
Interest saved	₹21,47,000

Option 2: ₹10 L Prepayment in Year 5

Metric	Value
Tenure reduction	51 months
New tenure	189 months
Interest saved	₹14,32,000

Winner: Early prepayment saves ₹7,15,000 more than delayed prepayment.

The Optimal Strategy: Hybrid Approach

The best approach combines both strategies:

1. Increase EMI by 5-10% annually (linked to salary growth)
2. Make prepayments whenever you receive lump sums
3. Prioritize early prepayments over investments giving <8.5% returns

Example Hybrid Plan

Year	Base EMI	Step-Up	Bonus Prepayment	Total Extra
1	₹43,391	-	₹1,00,000	₹1,00,000
2	₹47,730	₹4,339	₹1,50,000	₹2,02,068
3	₹52,503	₹4,773	₹1,50,000	₹2,07,276
4	₹57,753	₹5,250	₹2,00,000	₹2,63,000
5	₹63,528	₹5,775	₹2,00,000	₹2,69,300

Result: Loan closed in ~12 years instead of 20, saving ₹28+ lakh in interest.

When Prepayment Doesn't Make Sense

1. Your Loan Rate is Low

If your home loan rate is 7% and you can earn 12% in equity, investing may be better.

Loan Rate	Equity Return	Better Choice
9%+	12%	Prepay
7-9%	12%	Invest (marginally)
<7%	12%	Definitely invest

2. You Lose Tax Benefit

Home loan interest up to ₹2 L gets 80C deduction. If prepayment reduces interest below ₹2 L, you lose tax benefit.

Tax Bracket	Effective Loan Cost (8.5% rate)
30%	8.5% - (8.5% × 30%) = 5.95%
20%	8.5% - (8.5% × 20%) = 6.8%
5%	8.5% - (8.5% × 5%) = 8.08%

At 30% bracket, your effective rate is only 5.95%—lower than most safe investments.

3. No Emergency Fund

Don't prepay if you don't have 6 months' expenses saved. Liquidity matters more than interest savings.

4. High-Interest Debt Exists

Pay off personal loans (12-18%) and credit cards (24-40%) before home loan prepayment.

Banks' Perspective: Why They Allow Prepayment

Most banks now allow prepayment without penalty (RBI mandate for floating rate loans). But they're not doing you a favor—they prefer:

1. Higher EMI over prepayment (keeps you as a longer-term customer)
2. Part prepayment over full closure (some revenue continues)

Always confirm:

• No prepayment penalty
• No minimum prepayment amount
• Prepayment reduces principal, not just future interest

Prepayment Rules to Know

Floating Rate Loans

• No prepayment penalty allowed (RBI rule)
• Can prepay any amount, any time

Fixed Rate Loans

• Banks can charge up to 2% penalty
• Check your loan agreement

Part Prepayment Process

1. Check outstanding balance via netbanking
2. Calculate desired prepayment amount
3. Transfer to loan account (or use bank's prepayment portal)
4. Request new amortization schedule
5. Verify tenure reduction

Action Plan

If You Have a Home Loan:

Step 1: Get current amortization schedule

• Note total interest remaining
• Note current principal outstanding

Step 2: Calculate affordability

• Can you increase EMI by 10%?
• Do you have lump sum available?

Step 3: Choose strategy

Your Situation	Strategy
Stable job, regular income	Increase EMI by 10%
Variable income, occasional bonuses	Prepay when possible
High loan rate (9%+)	Aggressive prepayment
Low loan rate (<7.5%), high tax bracket	Consider investing instead

Step 4: Execute and track

• Set up higher EMI (contact bank)
• Or make prepayment
• Get revised schedule
• Track interest savings

Conclusion

Both prepayment and higher EMI reduce your loan burden—the difference is usually marginal (5-10%). What matters more:

1. Do something: Any extra payment beats doing nothing
2. Start early: Interest savings compound over time
3. Be consistent: Regular higher EMI beats sporadic prepayments
4. Stay liquid: Don't compromise emergency fund for prepayment

The best strategy is the one you'll actually follow.

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Calculate your loan savings: Use our EMI Calculator to see how prepayments and higher EMIs affect your home loan.