How much of a home loan should you prepay?

Interest is charged on what is still outstanding

Each month the lender charges interest on the balance left, then your EMI pays that interest and a slice of principal. A part-payment reduces the balance immediately, so every later month's interest is smaller. The same rupee paid in year two saves more than the same rupee paid in year fifteen, because it avoids more months of interest. Early EMIs are mostly interest, which is why a prepayment in the first few years moves the total so much.

Keep the EMI and cut the tenure if you can

After a part-payment the lender will either shorten the loan and keep the EMI, or lower the EMI and keep the tenure. Shortening the tenure saves more interest, because you continue paying at the old speed. Lowering the EMI frees monthly cash and saves less. If the current EMI is already comfortable, ask for a shorter tenure.

On floating-rate home loans to individuals, banks are not allowed to charge a prepayment penalty. Fixed-rate loans, and many car and personal loans, can still charge one. The calculator does not subtract a penalty, so check the sanction letter before you transfer the money.

Do not empty the emergency fund to do it

A useful order is: keep a few months of expenses aside, clear any costlier debt, then prepay or invest what is left. If the home-loan rate is 8.5% and a long-term investment might earn more after tax, prepaying is the safer return, not always the larger one. Run the prepayment calculator with the amount you could pay this year, once with "reduce tenure" and once with "reduce EMI". The interest saved is the number to compare with what that cash would earn if you invested it instead.

Prepaying also cuts the home-loan interest you can claim under section 24(b) in the old tax regime. The tax you give up is usually much smaller than the interest you stop paying.