Repay or Invest? The Math Behind Smarter Wealth Decisions
For many successful professionals and business owners, the urge to prepay a home loan stems from financial discipline and the comfort of being debt-free. While this mindset is understandable, it is often not the most efficient use of capital from a wealth management perspective. At current interest rates, the numbers clearly favour maintaining the home loan and deploying surplus funds into equity markets instead. Here’s why:
Your loan is structured efficiently
Home loans in India run on a reducing balance. With each EMI, the principal shrinks, and interest is charged only on the outstanding balance. This ensures that the actual interest outgo is far lower than it appears when you look at the full tenure cost. In effect, you are paying interest on a diminishing base. However, when the amount is invested, it compounds from Day 1, creating wealth that grows much faster than the savings achieved by prepaying. In short, the gains from investing outweigh the savings from loan repayment.
Chart below illustrates the incremental return one could make by investing the amount in an investment vehicle generating a similar return as the loan. Amount considered is INR 2.0 Cr and rate of interest at 8% throughout the tenure.
As seen above, while one pays a total interest of INR 91 Lakh on a 10-year loan, the potential gains from investing the loan amount in an asset earning similar to the loan rate would be INR 2.31 Cr, generating a net gain of INR 1.4 Cr. As tenure increases, the earnings increase substantially over interest paid on the loan.
Selecting the right investment could boost gains
With home loan rates between 7-8%, equity portfolios over the long term can reasonably be expected to generate 12% or more. In 10 years the incremental over loan interest increases by more than 2x.
Strategic timing around interest rate cycles
Equities tend to thrive when interest rates are low, as they are today (Mentioned in detail in our blog on the
Inverse relationship between Nifty 50 PE and Repo rate). Over time, when interest rates rise and peak, equities often face valuation pressures. That is the point when it makes sense to reassess and consider prepaying part of the loan. Until then, your capital is better utilized in markets rather than locked away in an illiquid loan prepayment.
Rolling return analysis shows that as the holding period increases from 1 to 3 & 5 years, volatility in returns tends to reduce. Those that remain invested through market cycles will benefit from the long-term upward trend of the market and are less likely to be negatively impacted by temporary downturns
Liquidity and flexibility matter more than zero debt
Repaying your loan early locks up capital. Keeping the loan while investing surplus funds allows you to stay liquid, diversified, and compounding. For high-net-worth individuals, where EMIs do not impact lifestyle, this approach maintains financial flexibility while accelerating wealth creation. For clients whose cash flows are strong and steady, repaying a home loan today is a sub-optimal allocation of capital.
When interest rates are low, the smarter strategy is to continue servicing the loan, while allowing your surplus funds to work harder in equities. Later, as interest rates climb, we can always pivot and consider partial repayment. Wealth creation is not about eliminating liabilities at the earliest opportunity — it’s about making every rupee work harder. And in the current environment, the math is unambiguous: let your loan run and let your capital compound. Ultimately, the right decision will also depend on your personal goals, risk appetite, and financial situation.
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