Posted on 11 October 2026
My home loan interest rate is 8.65% with a 16-year tenure remaining. I have a surplus of ₹5 Lakhs. Should I make a principal prepayment to reduce tenure or invest in equity index funds?
Portal Admin & Advisory
This depends on your tax bracket, risk tolerance, and peace of mind. Here is a quantitative breakdown: 1. Effective Cost of Home Loan: If you claim tax deduction under Section 24(b) (up to ₹2 Lakh interest deduction under old tax regime), your net effective interest cost may be around 6.5%–7.2%. Under the new tax regime, no home loan interest deduction is available for self-occupied property, so your effective rate remains 8.65%. 2. The 'Guaranteed Return' of Prepayment: Prepaying ₹5 Lakhs gives you a risk-free, tax-free return of 8.65% saved interest over the loan life. Prepaying early in the tenure (years 1–7) saves the maximum interest because EMIs are heavily interest-weighted upfront. 3. Recommended Balanced Hybrid Approach: - Keep a 6-month emergency reserve. - Allocate 50% of the surplus (₹2.5 Lakhs) towards home loan principal prepayment (request tenure reduction rather than EMI reduction). - Direct the remaining 50% into a diversified equity mutual fund SIP/STP with an investment horizon of 5+ years.
