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Compare both paths with your own figures. See the return your investment would need to beat, and how much interest prepaying would save.
It is the yearly return your investment would need to earn for investing to leave exactly as much as prepaying. Above it, investing comes out ahead on your figures. Below it, prepaying does. You can see it without entering any expected return, so you can judge for yourself whether that return seems achievable.
A loan rate of 8.5% is charged monthly, which works out to about 8.84% a year in the terms used for investment returns. So before tax, the return to beat is slightly above the stated loan rate. Tax on investment gains can push it higher, while tax saved on loan interest can bring it lower.
Both spend the same money every month until the original loan end date. If you prepay, the extra goes to the loan, and once it closes, the EMI you no longer pay is invested until that date. If you invest, the loan continues as normal and the extra is invested. We then compare what each leaves at the end, when both loans are finished.
Reducing the tenure keeps your EMI the same and usually saves the most interest. Reducing the EMI lowers your monthly payment and leaves the end date as it is, with the saving invested in this comparison. Ask your lender which options it offers.
It is certain as long as your loan rate stays the same and you would otherwise pay the loan to its end. Floating rates can change. An investment return is not certain at all, and it can be lower or negative. Comparing the two as if they were equally certain can mislead, which is why the page points this out.
Tax is optional, and you enter your own figures, because they depend on your situation. For a home loan, a deduction for interest depends on your tax regime and whether you live in the home, and there is usually a yearly limit. Check with a tax professional if you are unsure.
No. It shows what your own figures work out to. It is not investment, tax or legal advice, and it does not recommend either path. Consider your emergency money, your other goals and your comfort with risk, and speak to a SEBI registered adviser if you would like help.
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