The desire to own a house is a common aspiration for many of us. We Indians also have an emotional attachment to the concept of “Home.”
The idea of creating a safe and comfortable living space for our family holds paramount importance.
Owning a home is also deeply rooted in Indian culture and is considered a symbol of social status, success, and stability. It is often seen as a long-term investment for the family’s future and provides a sense of pride and accomplishment.
In order to acquire a dream home, the go-to option is a Home Loan. Though these loans help us with huge capital in acquiring our dream home, they cost us an insane amount of money over our lifetime.
What if we say that there is a possibility to get back all the interest that you had paid for your Home Loan?
Sounds crazy right?!
Let’s delve deep and see how we can accomplish this.
Table of Contents
- The 0.1% SIP Strategy-Interest free Housing loan.
- SIP Prepayment Strategy: Accelerate Loan Closure
- SIP & Power of Compounding
1. How much do we really pay?
Most of us make some down payment for a loan and acquire the rest in the form of a housing loan.
Let’s say you have finalized a property for about 75 lakhs. You have plans to prepay 25 lakhs and approach a bank for a loan of 50 Lakhs for the rest.
The bank then does the usual process of filling up the application, verifying the properties, and finally disbursing the loan. The bank then asks us to pay an EMI of say 40K per month for the loan that you just acquired.
Consider that you are drawing a monthly salary of more than 1,00,000 and consider a 40K loan to be a manageable one and you go for it.
But is that the only amount we pay?
NO! That’s not the full picture. The cost of these loans is massive when worked out for the entirety of the loan duration.
2. Example of a Home Loan
Above is a sample representation of the loan that you have just taken. The interest we pay is a whopping ~150% of the original principal amount.
“So, to nullify the interest the best way is to buy a home with the full capital”.
However, for the majority of us, this may not be a viable choice.
So how do we get our returns?
3. Countermeasure-Invest in Equities
“A little SIP today can lead to a lot of wealth in the future. Start small, dream big!”
The best possible investment is to invest in an Equity mutual fund for the whole tenure of the loan.
We all know how SIP investing has been instrumental in wealth creation.
In the below 2 strategies we will discuss how a simple SIP helps us to grow our wealth while managing a loan.
- The 0.1% SIP Strategy-Interest free Housing loan.
This Strategy is all about continuing your SIP all through your tenure and seeing what magic it creates.
Let’s explore how investing just 0.1% of your Home Loan as a Systematic Investment Plan (SIP) in an equity fund can help offset the interest you pay throughout your tenure.
Let us understand this through an example,
Consider a scenario where you invest ₹5000 per month (0.1% of a ₹50,00,000 loan) in a mutual fund.
Considering a very achievable return of 12% CAGR, this investment over the entire tenure of 25 years gives you approximately 79 lakhs.
This amount is even more than the interest we have been paying for over 25 years.
Remarkably, a mere 0.1% of your loan invested through SIP can practically render your Home Loan interest-free.
Even a very modest return of 10% gives you ~52 Lakhs as interest.
This financial calculation remains valid regardless of your loan amount.
- SIP & Home Loan Prepayment Strategy: Accelerate Loan Closure
In this strategy, the SIP helps you in closing out the loans much earlier than you anticipated.
Let us see an illustration of how this is accomplished.
For the above-said loan of 50 lakhs, you start a SIP of 5000 per month as you have some additional money to spare.
You start this SIP in an Index fund along with your EMI. So, this SIP also grows slowly as the loans also start to reduce, courtesy of your continuous repayments.
Now it’s year 15 in your EMI journey. You are happily paying the EMIs and the SIP and you are well. You have closed just 40%of your housing loan amount until now with about 30 lakhs pending.
Surprisingly, you observe that the SIP you initiated along with your loan has grown significantly, and it has now nearly reached an amount equal to the remaining Home Loan balance, as shown below.
If you have any doubts regarding SIP calculation, you can refer to our Home Loan Interest Recovery Calculator. This calculator is an easy tool that helps you calculate the SIP amount and timespan required to recover your Home Loan Interest.
- SIP & Power of Compounding
So, you choose to redeem the units and pay off the remaining 60 % of the outstanding loan. Thanks to the SIP you initiated, the loan has turned from an arduous 25-year tenure to a much more manageable 15-year tenure, effectively saving you 10 valuable years.
The results showcased above vividly demonstrate the power of compounding and how it has beautifully unfolded in your investment journey through the SIP.
4. The only Challenge
The challenging part is to continue your SIP all through the period along with your existing EMI. We must maintain discipline and consistency in your SIP regardless of the market conditions or personal circumstances.
You may also read through the Common SIP mistakes and how to sail through them in one of our earlier blogs to understand more about the Dos and don’ts.
5. A ‘Bonus’ Hack:
Let us assume that you happen to get a bonus of 5,00,000 after year 1 of your loan journey.
What would be our ideal thought? -Prepay the loan, right?
No. Never do that.
Invest this 5lakhs as a lumpsum in an index fund and let it go on until the end of your loan tenure, say for the next 24 years.
And the magic happens!
“You will earn another 44 lakhs and will provide greater benefit than the prepayment”.
6. Invest or Repay?
Many people believe it’s wise to pay off their Home Loan completely before considering other investments. This is because clearing the housing loan provides a sense of financial security and stability. Some feel that investments come with risks, so it’s safer to focus on repaying the loan first. By doing so, individuals secure their homes and can make better investment decisions in the future.
Which is a better option?
Even though other investments may offer higher returns, some prefer to ensure they fully own their home and have peace of mind before exploring riskier options.
We cannot conclude one is a better option than the other without looking into the mindset of the person and his long-term financial goals. It is wise to gain knowledge about various other options but in the end, don’t fall for peer pressure and always choose an option that you are comfortable with.
7. Investment In INDIA
Morgan Stanley report says that this decade is predicted to be “India’s decade” due to various driving factors such as Economic Growth, The growing middle class, Rapid infrastructure Capex and policy support from the government.
With these positive factors, India is set to achieve substantial growth and development in the upcoming decade.
We have further discussed “Why this decade belongs to India “in our growth outlook for India blog. Do check it out.
Yes, you read that right.
- A small SIP of 0.1% in addition to our regular EMI can effectively make our housing loan interest-free.
- A small SIP from the beginning of the loan tenure when compounded can help reduce your EMI tenure.
While it may be challenging to allocate additional capital, considering the bigger picture will show us the immense benefits of this approach. Moreover, the strategy of not prepaying the loan may prove to be highly advantageous.
There is a lot of misguided information about investment and Home Loans on social media sites like Quora, Facebook, Twitter, etc. It is always a good decision to consult a professional financial planner who is an expert in solving your investment-related doubts.