Due to the wave of global inflation, interest rates have remained relatively high, along with a significant increase in living costs over the past few years. This has prompted Indian homeowners to reconsider their long-term financial commitments.
One powerful way to take control of your financial health and significantly reduce your overall debt burden is through proper planning and prepayment of your home loan. Whether done fully or partially, prepaying your housing loan can unlock multiple benefits. These include improved creditworthiness, savings through reduced interest payments, and long-term gains such as reduced processing fees—just a few of the advantages you can enjoy by proactively managing your home loan.
This write-up is dedicated to discussing the key points to keep in mind when considering the repayment of your home loan.
Home loan interest rates in 2025: Still hover around 9%
As of April 2025, home loan interest rates at banks such as SBI, Kotak Bank, HDFC Bank, ICICI Bank, and others range between 8.25 per cent and 10.25 per cent, depending on factors such as the borrower’s credit profile, credit score, loan amount, and repayment capability.
It is commonly observed that over a typical 20-year repayment tenure, borrowers may end up paying 1.5 to 2 times the loan amount in interest. For example, on a ₹75 lakh loan at a 9 per cent interest rate, the total interest paid could exceed ₹85 lakhs if the loan is not repaid early.
Expert Views
Rishi Anand, MD & CEO of Aadhar Housing Finance Ltd, shared his views on prepaying a home loan in an exclusive conversation with Mint. He stated, “Prepaying a home loan can be a financially sensible decision, especially in the early years of the loan tenure when the interest component is highest. In the current scenario, opting for a floating-rate loan is advisable. With interest rates at their peak and expectations of rate cuts in the near future, floating-rate borrowers stand to benefit as lenders pass on reduced funding costs.”
He added, “An added advantage is the absence of prepayment penalties on floating-rate loans, making part-payments and full prepayments easier and more cost-effective. There are different loan structures available; choosing the right type depends on individual financial goals and the prevailing interest cycle. Industry data indicates that 80–85% of the consumers out of 33 trillion outstanding home loans are already on floating rates, reflecting consumer preference for flexibility and potential savings.”
This write-up is focused on discussing five important points to keep in mind when considering the option of prepaying your home loan:
1. Focus on slashing your overall interest outgo
You should focus on slashing your overall interest outgo. The earlier you prepay, the greater your savings. Home loan EMIs are extremely interest-heavy, especially in the initial years. Hence, prepaying during this phase significantly reduces the principal, thereby lowering the overall interest burden on your loan.
For example, if you prepay ₹5 lakhs in the fifth year of your ₹75 lakh home loan, it can potentially help you save over ₹10–17 lakhs in interest over the remaining tenure. Warren Buffett, Chairperson of Berkshire Hathaway, perfectly sums up the concept of saving and financial discipline with this quote: “Do not save what is left after spending, but spend what is left after saving.
2. Achieve peace of mind by gaining financial freedom
Prepaying your home loan reduces your monthly EMIs and shortens the overall loan tenure. This, in turn, helps free up your cash flow. Such flexibility is particularly beneficial during uncertain times, allowing you to redirect funds towards higher education, retirement planning, health management, or even investments that offer higher returns in the future. Moreover, owning your home outright also brings a sense of mental peace, calmness, and clarity—especially for those approaching retirement.
3. Propel your credit score and future loan eligibility
Prepayment clearly reflects strong financial health, positively impacting both your credit report and credit profile by showcasing financial clarity and discipline. A solid credit history and low outstanding debt can boost your credit score and improve your eligibility for future credit—be it a personal loan, car loan, home loan, or business funding. Lenders tend to favour borrowers with lower debt-to-income ratios. It’s also important to maintain a low credit utilisation ratio, as this demonstrates that you are not overly reliant on debt or frequent credit borrowing.
4. Tap into your home equity
Do remember that once you complete the entire repayment process of your home loan, your property becomes a fully owned asset. This means you can further leverage your home’s equity in the future through home equity loans or mortgage-based borrowing. These options typically offer relatively lower interest rates, higher loan amounts, and more flexible repayment terms—depending entirely on your property’s market value.
5. No prepayment penalty on floating-rate loans
There are ongoing discussions, spurred by the RBI, regarding prepayment terms—particularly penalties on floating-rate loans. Most banks and NBFCs currently do not charge a prepayment penalty on floating-rate home loans. However, this remains an evolving issue. It is advisable to contact your respective home loan provider for detailed information regarding applicable interest rates, prepayment terms, and any potential penalties.
Conclusion
Therefore, to conclude, home loan prepayment is not just about saving on interest rates. It’s about regaining financial control and strengthening your financial future. Before opting for prepayment, it is essential to carefully evaluate your existing financial obligations and challenges. Factors such as emergency fund management, potential investment returns, and your overall financial capacity should all be taken into account.
It is always prudent to repay your home loan if the interest rate on the loan exceeds the returns from low-risk investments. By taking these simple yet practical steps, borrowers can improve their financial well-being, reduce stress, and create room for wealth-building opportunities in the future.
Disclaimer: This article is for informational purposes only and should not be construed as financial advice. Please consult a qualified financial advisor before making any loan-related decisions.
