Rs 52,422 Home Loan EMI vs Rs 20,000 SIP: Which option may help you reach faster to Rs 66 lakh to buy home? See calculations
Rs 52,422 Home Loan EMI vs Rs 20,000 SIP: Repaying a home loan is a long process since the durations can range from 15 to 30 years. Making an investment during the same period may help one create a large corpus that may fulfil many financial needs in the future. What will be the projected outcomes if one repays a home loan or starts an SIP investment?
Rs 52,422 Home Loan EMI vs Rs 20,000 SIP: Real estate gets expensive every year! Rents also increase! The income flow of a person may stop at a certain age! Amid such a scenario, owning a home becomes a necessity for a person. But buying it is also not easy. A 2-bedroom flat in a Tier I or Tier II city may cost a bomb depending on the location and the condition of the infrastructure. Squeezing money from monthly income and committing to a long-term equated monthly instalment (EMI) takes some effort. But what if one doesn't have enough money to pay an EMI? Should they wait till their income is in sync with the required EMI? Should they start investing and create a corpus? That can depend on a lot of factors, such as monthly income, financial goals, and liabilities. Here, we will talk about 2 scenarios, where we will show home loan calculations, and in the second, we will show what if the same person invests the amount equal to the loan in a mutual fund through an SIP.
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(Disclaimer: This is not investment advice. Do your due diligence or consult an expert for financial planning.)
Why buying a home requires a long commitment
Most people who buy a home have a fixed monthly income. It is likely to increase, but within that income, they need to complete all their financial needs, and repaying a home loan EMI is one of those.
Take the example of a Rs 55 lakh home loan and see how much a person needs to pay as an EMI if they take this loan for the 20-, 25-, or 30-year duration at a 9.5 per cent interest rate.
Why buying a home requires a long commitment
If it is taken for 20 years, the estimated EMI will be Rs 51,267, and the estimated repayment amount will be Rs 1,23,04,132.
If it is taken for 25 years, the estimated EMI will be Rs 48,053, and the estimated repayment amount will be Rs 1,44,15,995.
If it is taken for 30 years, the estimated EMI will be Rs 46,247, and the estimated repayment will jump to Rs 1,66,48,913.
So, the situation is like that if one wants to repay the lowest amount, they need to go for the lowest-tenure loan, but their EMI will be the highest. If they go for the lowest EMI, the tenure and the repayment will be the highest.
To repay such an EMI for a long tenure needs commitment and a regular income flow.
How mutual fund SIP investment works
In a mutual fund SIP, one can begin with a small monthly amount and increase as their income rises. Because of rupee cost averaging of their net asset value (NAV) units, they get compound growth. If they stay in their investment for a long time, their corpus grows faster.
Let's see how a Rs 10,000 monthly SIP investment can grow in 20, 25, and 30 years at a 12 per cent annualised return.
How mutual fund SIP investment works
In 20 years, the investment will be Rs 24,00,000, and the estimated corpus will be Rs 99,91,479.
In 25 years, the investment will be Rs 30,00,000, but the estimated corpus will grow to Rs 1,89,76,351.
In 30 years, compounding will show its impact more vigorously, and on an investment of Rs 36,00,000, the estimated corpus will grow to 3,52,99,138.
Staying invested for a long period is the key to generating a larger corpus.
Home loan calculations
Here, we are taking the example of a Rs 60 lakh home loan, where the tenure is 25 years and the annualised growth is 12 per cent. We are assuming that if someone makes a 10 per cent down payment, the cost of the home will be Rs 66,00,000.
What will be home loan EMI?
The estimated EMI for this loan will be Rs 52,422.
What will be interest and repayment amounts?
The estimated interest will be Rs 97,26,540, and the estimated repayment will be Rs 1,57,26,540.
What will be SIP investment?
We will take the same amount as a home loan (Rs 60 lakh) for the SIP investment. It will be spread to 25 years, so the monthly SIP investment will be Rs 20,000. We will calculate SIP returns at 8 per cent, 10 per cent, and 12 per cent.
SIP corpus from 8% returns
At 8 per cent annualised growth, estimated capital gains in 25 years will be Rs 1,31,47,331, and the estimated corpus will be Rs 1,91,47,331.
SIP corpus from 10% returns
At a 10 per cent annualised return, estimated capital gains in 25 years will be Rs 2,07,57,807, and the estimated value of the corpus will be Rs 2,67,57,807.
SIP corpus from 12% returns
At a 12 per cent annualised return, the investor will get estimated capital gains of Rs 3,19,52,702 and the estimated corpus of Rs 3,19,52,702.
Cost of Rs 66 lakh home in 25 years
If we consider a 5 per cent average annual price rise in the real estate sector, a Rs 66 lakh home will cost an estimated Rs 2,20,11,307 in 25 years. It will come at a loan repayment cost of Rs 1,57,26,540.
Factors we are not calculating
We are not calculating the rent the SIP investor will pay in 25 years. At the same time, we are also not calculating tax benefits they would have got on the repayment of the principal and the interest of the home loan.