WHY INDIANS PREPAY HOME LOANS EARLY AND IS IT ALWAYS WISE?

Traditionally considered auspicious, the festive period amplifies buyer enthusiasm, and developers are gearing up with launches and offers that match market sentiment. While, it is a great time to invest in property with lucrative offers and incentives from developers on properties and from banks on home loans, a factor to be considered is the borrowing cost and property appreciation. “Borrowing costs influence both your financing expense and the benchmark yield you seek from AUGUST 2025 | rprealtyplus.com property investment. India’s policy repo rate rose from 4.0% in January 2020 to 6.75% in August 2025, a 2.75 percentage point increase, while consumer inflation averaged 5.1% yearly throughout the same period. When your mortgage interest rate or other cash returns equal or surpass inflation, your ‘real’ profit approaches zero. Therefore, get fixed-rate loans when borrowing costs are low. Also, choose micro markets with above-average rental and capital appreciation, as per Anil Pharande, Chairman of Pharande Spaces.

Home Loan Strategy

In the initial years of a home loan, the interest component in equated monthly instalments (EMI) is larger, which gradually decreases as time goes on. Prepaying the home loan earlier reduces the home loan principal, cutting the total interest cost. However, one should also compare the total prepayment savings in interest with probable returns from other investments during the corresponding time. Prepayment makes sense if interest savings beat investment returns. Another factor to consider is the tax deductions, financial planners state that, those who continue in the old regime should carefully calculate the net tax impact before closing the loan to avoid losing out on tax deductions. Under the old tax regime, borrowers could claim deduction of up to ?2 lakh per annum on interest paid on a self-occupied property loan under Section 24(b).

Why Indians Prepay Home Loans Early

Interest: At the beginning of a home loan, a significant percent of the EMI is towards interest. Paying principal early would lower the principal outstanding and thus lower the interest liability by a vast quantity for the remainder of the tenure. As a few scenarios indicate, prepaying ?5-10 lakhs early would lower the interest outgo by lakhs of rupees by the time the loan matures.

Reduction of Debts & Better Cash Flow: Early repayment of part or the whole amount of the loan provides lenders with mental relief, reduces fixed obligations, and frees up funds for other financial objectives. It provides more flexibility later for budgeting and investment.

Regulatory and Policy Drivers: Recent regulations make prepayment more favorable: From January 1, 2026, RBI will prohibit lenders from charging prepayment or foreclosure penalties on floating rate loans for individuals (non-business purposes) and on certain MSME loans. This move is aimed at increasing transparency and giving borrowers greater flexibility.

Lump Sums or Windfall Gains: People generally receive bonuses, inheritance, mature insurances, or other lump sums and would want to use those for a large liability like a home loan.

Tax Considerations: While interest and principal repayments on home loans offer tax benefits under provisions like Section 80C and Section 24, in certain situations, the interest saved through prepayment — particularly when rates are high — may outweigh these benefits.


Is It Always Wise? Things to Watch Out For

Being debt-free brings peace of mind, which is valuable. At the same time, it’s important to maintain long-term wealth-building strategies through investments. “A balanced approach, continuing systematic investments while making occasional prepayments, can help borrowers reduce debt responsibly while staying on track with their financial goals,” says Pramod Kathuria, Founder & CEO, Easiloan. He shares why it is not always advisable to pre pay home loans.

Opportunity Cost: Amount saved for prepayment would yield more elsewhere (equity, mutual funds, ventures). If anticipated investment yield > interest rates for home loan, investing may yield more.

Emergency Liquidity: Borrowers should maintain 6–12 months’ worth of expenses before committing substantial funds to prepayment to ensure financial safety.

Fixed vs Floating Rate Loans: Fixed-rate loans may also incur prepayment charges/penalties or lock-in. Even for floating rate, ensure your financier allows prepayment/foreclosure without large charges. Regulatory mandates are helping this.

Term of the Loan: Since the loan could well be mid way through its later years, the interest element less so, prepaying at this time generates less incremental value than prepaying earlier.

Tax Benefits: Borrowers also cannot forgo valuable tax benefits by prepaying unnecessarily, particular if the borrower qualifies for principal and interest deductions.