Ritesh Sabharwal CFP®

W.M.W #16: H² rule: Prepay loan or invest?

Reading time: 5 minutes - October 4, 2025

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Hey Reader

My friends and followers keep asking me this question time and again:

"I’ve got a home loan going on. I’m also investing in SIPs. Now if I get a bonus or salary hike, should I prepay my loan to feel lighter - or invest extra and grow wealth faster?"

On one side, the logic of prepaying feels comforting: fewer EMIs, less interest, and peace of mind.

On the other side, investing feels powerful: compounding, wealth creation, and the promise of future independence.

The problem? Both come with trade-offs. And most people don’t run the numbers - they just go with what “feels right” in the moment. It’s a real dilemma. Let’s break it down.

Scenario 1 – Investing the Extra Money Instead of Prepaying

📌 Imagine you have:

• Loan: ₹1.5 Cr
• Tenure: 25 years
• Interest Rate: 8.0%
• EMI: about ₹1.16 lakhs/month

Now, in year 2, you get a salary increment or a bonus. Instead of prepaying the loan, you decide to invest ₹20,000/month in a SIP. Let’s assume you stick with it for the rest of the tenure (24 years of SIP), and the average return is ~10% (long-term equity market average).

Here’s what happens:

👉 Amount Invested: ₹57.6 lakhs

👉After 24 years, your SIP grows to ₹2.2Cr. That’s our benchmark number.

Scenario 2 – Prepaying the Loan Instead of Investing

Same setup:

📌 Loan: ₹1.5 Cr​
📌 Tenure: 25 years​
📌 Interest rate: 8.0%​
📌 EMI: ~₹1.16 lakhs/month

Now, instead of putting ₹20,000/month into a SIP, you decide to prepay ₹20,000 every month toward the loan principal starting second year i.e., 13th month onwards.

Here’s what happens when you do this consistently:

• Your loan tenure shrinks drastically from 25 years →17.3 years.
• The total interest paid drops from ₹1.97 crore → ₹1.29 crore.
• That’s a direct interest saving of ~₹68 lakhs.

So instead of being tied to EMIs for 25 years, you’re debt-free in just ~17 years.

Want to know how this magically happened? Download the Prepayment Calculator and try it for yourself.

And here’s the kicker: Once the loan is closed at 17th year, for the remaining 8 yrs the ₹1.16 lakhs EMI + ₹20,000 monthly prepayment = ₹1.36 lakhs/month of free cash flow is now in your hands.

If you invest that freed-up ₹1.36 lakhs/month in SIPs for the remaining 8 years at ~10% returns, guess what?

• Future corpus: ~₹1.96 crore by 25th year.

👉 Notice what just happened:

• You not only saved ~₹68 lakhs in interest,
• You also built a comparable (slightly lower) corpus than Scenario 1.
• And most importantly, you lived loan-free for 8 extra years.

That’s the mental and financial win people often overlook.

Because yes, investing early compounds wealth. But being debt-free earlier compounds peace of mind and ironically, gives you more investing capacity later.

Scenario 3 - The H² Rule: Hedge risk with prepayment, harvest wealth with SIPs

So far, we have seen the extremes:

• Scenario 1 (Investing) → Big wealth potential, but the burden of EMIs drags on for 25 years. But there is a sequence of return risk, you don't know if your equity return assumptions will be completely true.
• Scenario 2 (Prepaying) → Loan freedom 8 years earlier guaranteed, big interest savings, but miss out on compounding in the crucial early years.

But life isn’t about extremes. It’s about balance. That’s where the Hedge & Harvest Strategy comes in.

Balance prepaying and investing and use an allocation (like 50:50 or 60:40 or 70:30) based on your comfort.

Here’s the idea:

• Hedge → Use part of your surplus (say half of the ₹20,000/month) to prepay the loan. This reduces risk, shrinks tenure, and gives you psychological comfort that the debt is reducing.
• Harvest → Use the remaining part to invest in SIPs. This lets compounding work for you right away, building wealth alongside debt reduction.

Let’s run the math with ₹10,000/month toward each side.

📌 Loan: ₹1.5 Cr | Tenure: 25 years | Interest rate: 8%
📌 EMI: ~₹1.16 lakhs/month

Part A – Prepayment Hedge (₹10,000/month)

• Consistent prepayments shorten the loan by ~5 years.
• Interest savings: ~₹43 lakhs.
• You’re loan-free by year ~20 (instead of 25).

Part B – SIP Harvest

There will be 2 parts of investment.

One part is ₹10k/month available to invest from 2nd year onwards till 25th year. Second part is ₹1.16lakhs EMI + ₹10k additional prepayment amount available to invest for 5 years of loan tenure reduction.

₹10,000/month @10% return for 24 years Future corpus: ~₹1.12 crore

2. ₹1.26 lakhs/month @10% return for 5 years Future corpus: ~₹97 lakhs

Net Effect

• Loan freedom ~5 years earlier with 43 lakhs interest saved.
• Solid wealth creation alongside (~₹2.09 crore corpus = 1.12 Cr + 0.97 Cr).
• Saved lakhs in interest and earned crores through compounding.

👉 Why this works:

• You’re not all-in on risky markets, nor stuck in debt forever.
• You balance certainty (interest savings) with uncertainty (market returns).
• Most importantly, you buy yourself peace of mind. Knowing that you’re reducing debt and growing wealth lets balance both sides of the equation.

Now I want you to use this calculator and do this for yourself and email me back for any questions and I definitely want to know your poll answers:)

Here is the calculator again Prepayment Calculator​

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