Should You Prepay Your Home Loan or Start an SIP? The 2026 Math Explained
Confused between closing your home loan early or investing in mutual funds? We break down the math, tax benefits, and opportunity costs for Indian borrowers in 2026.
One of the most common questions we get at IndianFinEstimator is simple but stressful: "I have an extra ₹5,00,000. Should I close my home loan or put it in the market?"
In 2026, with interest rates stabilizing and market volatility remaining a factor, the answer isn't just about emotions—it's about pure math. While the peace of mind of being debt-free is huge, the "opportunity cost" of missing out on compounding returns can cost you lakhs in the long run.
Today, we are going to look at the numbers to help you decide.
The "Interest Rate Arbitrage" Rule
The decision largely depends on the gap between your Loan Interest Rate and your Expected Investment Return.
- • Home Loan Rate: Typically 8.5% - 9.0% (in 2026).
- • Equity SIP Return: Typically 12% - 15% (Long term average).
The Math: A Real-Life Example
Let's assume you have a home loan of ₹50 Lakhs at 8.75% for 20 years. You suddenly receive a bonus of ₹5 Lakhs.
Scenario A: You Prepay the Loan
If you pay that ₹5 Lakhs into your loan immediately:
- • You save roughly ₹14 Lakhs in future interest payments.
- • Your loan tenure reduces significantly (by approx. 5-6 years).
Result: Guaranteed return of 8.75% (tax-free saving).
Scenario B: You Invest in an SIP
If you instead invest that ₹5 Lakhs in a Nifty 50 Index Fund or Flexi-cap fund (assuming a conservative 12% return) for the remaining 15 years of your loan:
- • That ₹5 Lakhs grows to roughly ₹27 Lakhs.
Result: You earned more than you would have saved.
Our Pro Tip
Don't guess. Use our SIP Calculator and Loan Prepayment Calculator to plug in your exact numbers.
The "Hidden" Factors Most People Ignore
1. The Tax Shield (Section 24b)
Home loans offer tax deductions up to ₹2 Lakhs on interest payments. If you are in the 30% tax bracket, your effective loan interest rate isn't 8.75%—it's closer to 6.1%.
Verdict: If you are in the highest tax bracket, holding the loan is mathematically cheaper. Prepayment makes less sense.
2. Liquidity Risk
Once you prepay a loan, that money is gone. You cannot get it back in an emergency. If you invest in an SIP, the money remains accessible (subject to market conditions).
3. Psychological Peace
Math doesn't account for sleep. If having debt makes you anxious, prepaying is the "right" choice, even if the math says invest.
The Middle Path: The "Smart Top-Up" Strategy
At IndianFinEstimator, we often recommend a hybrid approach. Instead of a lump sum prepayment, try increasing your EMI.
- • If you increase your EMI by just 5% every year, you can close a 20-year loan in roughly 12 years.
- • Invest the rest of your surplus in a monthly SIP.
→ Compare exact numbers with our Prepayment vs SIP Calculator
Conclusion: Which One is Right for You?
Prepay if:
You are conservative, near retirement, or your loan interest rate is higher than 10%.
Invest if:
You are young, in the 30% tax bracket, and have a high risk appetite for equity markets.
Don't rely on rules of thumb. Check the exact difference for your specific loan amount using our free tools below.
Frequently Asked Questions
Should I prepay my home loan or invest in SIP?
It depends on the gap between your loan interest rate and expected investment return. If your loan rate is 8.75% and SIP returns 12%, investing earns more. But if you are conservative or near retirement, prepaying offers guaranteed savings and peace of mind.
What is the effective home loan interest rate after tax benefit?
Under Section 24b, you can claim up to ₹2 Lakhs deduction on home loan interest. If you are in the 30% tax bracket, your effective loan rate of 8.75% drops to approximately 6.1% after tax savings.
How much can ₹5 Lakhs grow in 15 years via SIP?
A lump sum of ₹5 Lakhs invested in an equity mutual fund at a conservative 12% annual return grows to approximately ₹27 Lakhs in 15 years due to the power of compounding.
Run the Numbers for Your Situation
Don't guess—calculate. Plug in your exact loan amount, interest rate, and expected returns to see what works best for you.