Most "should I prepay or invest?" advice ends with some squishy "both — it depends on your risk profile." It doesn't. It depends on two numbers:
- Your home loan interest rate (after the Section 24(b) deduction, if you're on Old regime)
- Your expected SIP return over the same horizon
If (2) is meaningfully bigger than (1) and you have time — invest. Otherwise — prepay. The rest of this post is just the math.
The math, with real numbers
You took a ₹50 Lakh home loan at 8.5% for 20 years. Five years in, you've come into ₹5 Lakh and you're trying to decide. The bank's RM is calling you about prepayment. A friend says SIP.
Option A — prepay ₹5L now.
The remaining principal drops. Future interest savings work out to roughly ₹14 Lakh over the loan's remaining life. Tenure shortens by ~3 years. The "return" on your ₹5L is effectively your loan rate — ~8.5%, guaranteed.
Option B — invest ₹5L for 15 years at 12% expected.
₹5L → roughly ₹27 Lakh. Pay your remaining ₹14L of loan interest from that corpus, you still walk away with ₹13L more than Option A.
That ₹13L gap is the lower bound. Over 20-year horizons the gap is wider. SIP that ₹5L over time instead of dumping it in, and the gap widens further (rupee-cost averaging through a few dips, plus more time in market).
The 24(b) angle that bankers don't bring up
If you're on the Old regime and claim Section 24(b), the ₹2L of interest deduction lowers your effective loan cost. At a 30% slab, you save ₹60K of tax on ₹2L of interest. Your 8.5% loan really costs you closer to 7.5% net.
Now the spread vs 12% expected equity is bigger, not smaller. The case for prepaying gets weaker.
If your bank's RM doesn't volunteer this, they're not on your side.
When prepayment actually wins
Three scenarios. Beyond these, the math doesn't favour it.
- Your loan rate is over 10% — rare for recent floating-rate borrowers, common for older fixed-rate or top-up loans.
- You're within 5 years of retirement — clearing EMIs before income stops is its own kind of return.
- You can't sleep with the loan. Behavioral peace beats a 3% delta. This is a real reason. I'd rank it above the others.
The caveat that's actually a caveat
12% is a long-horizon equity assumption. Over any given 5-year stretch you might see 4% or 18%. So match the horizon — if you'll need the money in 4 years, don't put it in equity SIP, prepay or use a debt instrument. The math above assumes 15-year-plus horizons.
Prepayment's return is guaranteed. SIP's isn't. If that bothers you more than ₹13L of expected upside, prepay. Either choice is defensible. The "obviously safer to prepay" framing isn't.
Updated May 26, 2026. Illustrative numbers. Equity returns aren't guaranteed; loan rate savings are. Talk to a SEBI-registered advisor for amounts this size.