Prepay your home loan or invest? A simple way to decide

The answer depends on one comparison most people get wrong: your loan rate against your realistic after-tax return.

When a bonus arrives, the question comes up every year. Put it into the home loan, or invest it? The honest answer is that it depends on three numbers and one feeling.

The three numbers

• Your loan rate. Prepaying earns exactly this, guaranteed and tax-free.
• Your realistic after-tax return. Not last year’s best fund. A long-run number for the mix you actually hold, after tax on gains.
• Tax relief on the loan. Under the old regime, interest up to ₹2 lakh a year on a self-occupied home is deductible, which lowers your effective loan rate. The new regime gives no such deduction.

Compare fairly

The fair test keeps the EMI the same after prepaying. The loan closes early, and every EMI you no longer pay gets invested until the original end date. Compare total wealth at that date. The prepayment vs invest calculator does exactly this.

The feeling

A paid-off home has value that does not show in a spreadsheet: lower risk if income drops, and freedom to change jobs. If the two options are close on numbers, many people rightly prefer the certainty of prepaying.

A rule of thumb

If your realistic after-tax return is less than 1.5 points above your loan rate, prepay. If it is clearly higher and you have an emergency fund and adequate insurance, investing usually wins over 10 years or more.