Prepay the home loan, start a SIP, or buy gold?

Most money advice answers this badly. Ask whether to prepay your home loan or start a SIP and you will be told that equities return more than home loans cost, so obviously invest — or that debt is bondage and obviously clear it. Both answers skip the actual arithmetic, and the arithmetic turns out to be unusually clean.

The calculator above runs the three options honestly. All of them spend the same money every month — your EMI plus whatever you have spare — over the same number of years, and all of them end with the loan fully repaid. That last constraint is what makes the comparison fair, and it is the one most comparisons quietly drop.

Why most comparisons are rigged

The usual version compares “interest saved by prepaying” against “corpus built by a SIP.” Those are not comparable quantities, and the framing hides a real advantage of prepaying: when the loan closes early, the EMI stops. That freed-up money does not evaporate. It gets invested too — for years.

So the calculator models what actually happens:

• Prepay — the surplus goes into the loan. It closes early. From that month on, the entire EMI plus the surplus goes into a SIP for the remaining years.
• SIP — the loan runs its full tenure. The surplus is invested monthly, from month one.
• Gold — same as SIP, at gold’s assumed return instead.

Total cash out of your pocket is identical in all three. What differs is only what you own at the end. That number, and nothing else, is the comparison.

Prepaying is an investment with a known return

Here is the part worth internalising: a rupee of prepayment earns exactly your loan interest rate.

Not approximately. Exactly. Prepaying ₹1 cancels the interest that ₹1 would have accrued at your loan rate, for as long as the loan had left to run. That is the definition of a return — money in, more money later — it just arrives as a cost you never pay rather than a balance that grows.

Which is why the calculator reports a break-even, and why that break-even lands on your loan rate every single time. Change the loan amount, the tenure, the surplus, anything — set the loan rate to 8.5% and the SIP needs 8.5% to tie. Set it to 11% and the SIP needs 11%. The rule is not a rule of thumb; it falls out of the maths.

That gives you a genuinely simple decision rule:

Will this investment beat my loan rate, after tax, over this horizon? If yes, invest. If no, prepay.

The comparison is not returns vs returns

The rule is simple; applying it is where judgement enters, because the two sides of that comparison are not the same kind of number.

Your loan rate is certain. It is contractual. You will pay it. The saving from prepaying is not an estimate.

A 12% equity return is an assumption. It is a reasonable long-run planning figure, but it is an average across periods that included some very unpleasant stretches, and you do not get the average — you get the specific sequence of years you happen to live through. Ten years of a SIP can land meaningfully above or below the number you typed above.

So when the calculator shows the SIP winning by a comfortable margin at 12% against an 8.5% loan, that margin is a risk premium, not free money. You are being compensated for accepting the chance it does not appear. Whether that is a good trade depends on things a calculator cannot see: how long the money can stay invested, whether a bad five-year stretch would force you to sell, and whether loan repayments would become frightening if your income paused.

Try this: set the SIP return to something pessimistic — 7%, say — and watch the ranking flip. That is not a defect in the plan. It is the range of outcomes you are actually choosing between.

Where gold sits

Gold is the option people most often misjudge, because it is the one with the strongest cultural pull.

The distinction that matters is that gold produces nothing. A business earns, and can reinvest those earnings to earn more — that is what compounding is in equity. A bond pays interest. Property can be rented. Gold does none of this. Its price is entirely what the next buyer will pay, and the long-run case for holding it rests on that price holding its value against currency debasement and panic.

That makes gold a reasonable stabiliser — a slice that tends to hold up when other things fall — and a poor engine. Against a home loan at 8.5%, it has to clear a bar it was never designed to clear.

Two practical notes if you do hold it. Physical gold carries making charges and purity questions that quietly eat into returns, so exchange-traded or fund routes are usually cleaner for investment purposes. And jewellery you intend to wear is a purchase, not a position — do not count it in this comparison at all.

What the calculator leaves out

Deliberately, so the mechanics stay visible. Adjust for these yourself:

• Tax, on both sides. Home loan interest deductions lower your effective loan rate, which lowers the break-even and favours investing. Capital gains tax lowers your effective investment return, which raises the bar and favours prepaying. They partly cancel, and the net depends on your income.
• Liquidity. Money in a SIP can be sold. Money paid into a loan is gone until you sell the house or refinance. If your emergency fund is thin, that difference outweighs a couple of percentage points.
• Prepayment terms. Floating-rate home loans to individuals generally cannot carry a foreclosure penalty; fixed-rate ones often can. Check your agreement.
• Tenure vs EMI. When you prepay, most lenders shorten the tenure and keep the EMI — the higher-saving option, and what is modelled here. If yours reduces the EMI instead, your savings will be smaller.
• Rate changes. A floating loan rate moves. The calculator holds it flat.
• How it feels. Some people sleep better without a mortgage and will accept a lower expected outcome for it. That is a legitimate preference, not an error to be corrected.

An order that works

Before this question is even worth asking:

1. An emergency fund covering several months of expenses, in something boring and reachable.
2. Kill expensive debt first. A credit card or personal loan at 14–36% dominates this entire discussion. Nothing here competes with clearing that.
3. Take the free money — any employer retirement match, and the tax-advantaged room you are entitled to.
4. Then compare your home loan rate against what you can realistically earn, and split accordingly.

And note that this is not either/or. Splitting the surplus — part prepayment, part SIP — captures some of the certain return and some of the expected one, and is what most people should probably do. Run the calculator twice with half the surplus each time to see roughly where you land.

Doing this with your real numbers

The version above uses round assumptions. Your actual position has a specific balance, a rate that has changed since you took the loan, and prepayments you have already made.

Klera keeps all of that on your phone. The loan manager holds real amortisation schedules, tracks rate changes mid-loan, and shows payoff progress against the original plan. The built-in calculators cover EMI, SIP projections, side-by-side loan comparison, and a tenure planner that does exactly what this page does — invests the EMI difference between a shorter and longer tenure and shows you the year-by-year result.

All of it runs offline, on-device, with no account and no server ever seeing your loan balance. Get Klera free on Android, or read more about how the offline design works.