Why Prepaying Your Home Loan Might Be the Dumbest Financial Move - Here's What the Wealthy Do Instead
Many people think that prepaying a home loan as fast as possible is the ultimate sign of financial wisdom. While being debt-free may feel good emotionally, it might actually be a costly mistake when viewed through the lens of wealth creation.
In this detailed guide, we’ll show you a smarter alternative: how you can use mutual fund investments to repay your home loan and build long-term wealth - at the same time.
Note: Names used in this article have been changed to protect client privacy.
1: The Cost of Prepaying Without a Plan
Let’s take the case of Rajiv, who takes a home loan of ₹50,00,000 (₹50 lakhs).
Loan Details:
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Loan amount: ₹50,00,000
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Interest rate: 8% per annum
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Tenure: 15 years (180 months)
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Monthly EMI: ₹47,783 (calculated using financial formula)
Rajiv diligently pays his EMI for 5 years (60 months), thinking that he’s making great progress. But here’s the reality:
After 5 years of EMI payments:
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Total paid: ₹47,783 × 60 = ₹28,66,956
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Principal repaid: ₹10,61,687
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Interest paid: ₹18,05,269
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Outstanding loan balance: ₹39,38,313
So, even after paying over ₹28.6 lakhs, Rajiv still owes nearly ₹39.4 lakhs to the bank.
This is because of how home loan amortization works - in the early years, most of your EMI goes toward interest.
2: Rajiv’s Strategy - Close the Loan Using SIP
Now Rajiv wants to free himself from the debt after 5 years. So, alongside his EMI payments, he also invests ₹47,783/month in a Systematic Investment Plan (SIP) in an equity mutual fund for 5 years.
Assuming 12% average annual returns (compounded monthly), his investment grows as follows:
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Monthly SIP: ₹47,783
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Duration: 5 years (60 months)
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Final SIP corpus: ₹38,38,915
After 5 years, he uses this amount to fully repay the outstanding ₹39.4 lakh loan. He tops up the small shortfall from his savings.
Result:
Rajiv becomes debt-free in Year 6. That sounds great - but is it the best option?
3: Arjun’s Strategy - Keep the Loan, Let Investment Grow
Let’s now consider Arjun, who follows the same plan as Rajiv for the first 5 years:
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He takes the same ₹50 lakh home loan.
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He pays ₹47,783/month as EMI.
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He invests ₹47,783/month in a mutual fund SIP for 5 years.
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He also ends up with ₹38,38,915 at the end of Year 5.
But here’s where Arjun does it differently:
Instead of repaying the home loan in one shot, he keeps the loan running and lets the mutual fund pay the EMIs for the next 10 years.
How?
He transfers the SIP corpus to a conservative equity or hybrid mutual fund and starts a Systematic Withdrawal Plan (SWP) to withdraw ₹47,783/month (same as EMI) for the next 10 years (120 months).
4: Final Corpus After 10 Years of SWP
Let’s see how Arjun’s money grows while also paying his loan EMIs:
| Mutual Fund Return (Annual) | Value After 10 Years of SWP |
|---|---|
| 10% | ₹4,07,142 |
| 11% | ₹8,37,742 |
| 12% | ₹13,18,692 |
Summary: Arjun pays all his EMIs from his mutual fund and still ends up with ₹4–13 lakhs in extra savings at the end of 15 years.
Rajiv became debt-free sooner, but Arjun became wealthier, with more liquidity and less risk.
5: Why Arjun’s Plan is Financially Smarter
1. Investment Returns Beat Loan Interest
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Home loan interest: 8%
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Mutual fund returns (conservative estimate): 10–12%
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Net gain: 2–4% annually on ₹38+ lakhs over 10 years = lakhs in wealth.
2. Flexibility and Liquidity
Rajiv used up his investment and lost access to it. If a job loss or emergency hits, he has nothing left.
Arjun, however, keeps his investment and uses SWP to pay EMIs - giving him control and confidence, even during tough times.
3. Compounding Advantage
Arjun’s money kept compounding over the years, even while withdrawals happened. That’s the real power of staying invested.
6: Common Mistakes to Avoid
1. Using EPF to Close a Home Loan
EPF is your retirement safety net. Don’t touch it for home loan repayment - especially in your 30s or 40s.
2. Borrowing From Friends or Taking Personal Loans
Replacing low-interest long-term debt with short-term high-interest loans or social obligations is never wise.
3. Making Random Prepayments
Paying ₹2–5 lakhs here and there might seem useful, but investing that same money can yield higher returns. It’s not about being debt-free fast - it’s about being financially better off in the long run.
4. Not Having a Contingency Fund
Don’t drain your reserves to close your loan. A job loss or medical emergency with no savings left can be financially devastating.
A Step-by-Step Guide to Follow Arjun’s Strategy
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Start a SIP equal to your EMI (₹47,783 in this example).
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Choose a diversified equity mutual fund (Flexi-cap or Large & Mid-cap).
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Invest monthly for 5 years without fail.
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At the end of 5 years, shift corpus to a hybrid or balanced fund.
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Set up SWP to withdraw the EMI amount every month for 10 years.
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Let your investment grow quietly in the background.
What You Should Do Next
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Calculate your EMI.
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Check if you can start a SIP for a similar amount.
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Choose the right mutual fund categories with the help of an advisor.
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Commit to this dual approach for at least 5 years.
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Watch your wealth and peace of mind - grow.
Final Thought
There’s no doubt that becoming debt-free is a wonderful goal. But there’s a difference between being debt-free and being financially free.
Rajiv chose emotional relief.
Arjun chose strategic patience - and walked away richer, calmer, and more financially secure.
So the next time you think of prepaying your home loan, stop and ask yourself:
Is this the smart move - or just the safe one?
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