Compare pre-paying your loan vs investing the surplus in SIP. See which path leaves you wealthier with side-by-side wealth projections, interest savings, and crossover analysis.
A common dilemma for borrowers with extra cash: pre-pay the home/car loan, or invest the surplus in equity mutual funds via SIP? This calculator simulates both paths month-by-month — Path A pre-pays the loan with your surplus, then invests the freed EMI for the remaining tenure; Path B keeps the original EMI and invests the surplus monthly. It then compares total net wealth, finds the break-even SIP return, and shows inflation-adjusted real purchasing power. Supports INR, USD and AED.
The headline framing — "should I pre-pay my loan or invest?" — hides what is actually a question about three things: your loan rate, your expected investment return, and your discipline. If your loan is at 8.5% and you can earn 12% in equity SIPs, the spread is 3.5% per year compounded over 15-20 years — often a 30-50% larger corpus by the end. But the spread only materialises if you actually invest the surplus every month without fail and without panicking during a 30% market drawdown.
The crossover SIP rate shown by the calculator is the return your investments need to earn for Path B to break even with Path A. If your loan is at 9% and the crossover comes out to 9.4%, that is your decision threshold. Indian large-cap equity has delivered roughly 12-13% over rolling 15-year periods historically — comfortably above 9.4%, so Path B has a margin of safety.
India: Home loan rates of 8-9% with Section 24 tax deduction give effective rates of 6-6.5% for high-bracket earners. USA: Mortgage rates of 6-7% with itemised deduction give effective rates of 4.5-5.5%. UAE: No personal income tax, so loan interest is not deductible but SIP gains are not taxed either. Pure rate comparison: 4-5% mortgage vs 8-10% expected equity return.
Path A: each month, EMI + surplus is paid against the loan. The outstanding balance shrinks faster, so the loan ends earlier than the original tenure. Once the loan is closed, the now-freed EMI is invested in a SIP for the months remaining in the original tenure. Path B: the original EMI is paid for the full tenure and the surplus is invested monthly in a SIP. Both end on the same date with a $0 loan balance.
Loan interest compounds on a shrinking principal, while SIP returns compound on a growing corpus. As long as your post-tax SIP return exceeds your post-tax loan rate, the surplus invested early grows faster than the interest you would have saved by pre-paying. The crossover SIP rate shown by the calculator is the exact break-even point.
Taxes can flip the verdict. In India, home loan interest is deductible up to ₹2L/year under Section 24, effectively reducing your loan rate by your marginal tax rate. Equity SIP gains over ₹1.25L/year are taxed at 12.5% LTCG. In the US, mortgage interest is deductible if you itemise. Re-run the calculator with post-tax loan rate and post-tax SIP return for an apples-to-apples comparison.
Not wrong, just incomplete. The math says invest if return > rate, but the math ignores three things: (1) Sequence-of-returns risk — equity returns are not smooth and a long bear market can permanently dent your corpus. (2) Behavioural risk — most people do not actually invest the surplus consistently; they spend it. (3) Psychological win — being debt-free is genuinely valuable. If you cannot guarantee disciplined SIPs, Path A is the safer default.
Yes. Build a 6-month emergency fund and adequate term + health insurance before deploying any surplus. Both paths assume you have a stable income for the entire tenure. A medical emergency or job loss without a buffer can force you to liquidate SIPs at a loss or default on the loan.
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