SIP vs EMI: Can 11-year SIP eliminate need for 25-year Rs 75 lakh home loan? See calculations with pros & cons here
Mutual Fund SIP vs Home Loan: When you take a Rs 75 lakh home loan for 25 years at a 9 per cent interest rate, the estimated equated monthly instalment (EMI) for it will be Rs 62,940, the estimated interest you will pay in that duration will be Rs 1,13,81,918, and the estimated repayment amount will be Rs 1,88,81,918. In equity mutual fund SIP, the expected return in the long run can be 12 per cent.
Home loan vs SIP: Buying a home is an ambition for many of us. Ambitions are achieved by sacrificing things. It can be in the form of comfort, cutting down on expenses, or delaying purchases that you feel can be postponed for the moment. Similarly, buying a home is a costly affair. Most of us don't have money to purchase a home in one go. So, we make a down payment and take a home loan for the rest of the amount. Since home loans are for a long duration, the borrower often ends up paying a higher interest amount than the principal. To pay an equated monthly instalment (EMI), one sacrifices their expenses or postpones them for years. However, what if instead of taking a home loan, one plans to purchase a home years in advance and invests money equal to the EMI? Even if they get a 12 per cent annualised return on their investment, just 10–11 years of their investment can help build a corpus that can help them buy a home. Here's how the maths can work out-
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(Disclaimer: This calculation is for knowledge purposes only. Do your own due diligence or consult an expert before buying a home.)
Home loan conditions
We will show calculations for Rs 75 lakh home loan for 25 years. The interest rate for this loan will be 9 per cent annually.
What will be the home loan EMI in such a case?
For the Rs 75 lakh loan, your estimated EMI will be Rs 62,940.
What will be interest and repayment amount?
The estimated interest amount of your loan will be Rs 1,13,81,918, and the estimated repayment amount in 25 years will be Rs 1,88,81,918.
Inflation-adjusted amount of Rs 75 lakh loan after 11 years
At a 6 per cent annual inflation rate, the value of Rs 75 lakh in 11 years will be Rs 1,42,37,239. So that can be our target amount from the SIP investment 11 years down the line.
What if you invest an amount equal to EMI in a mutual fund SIP?
Here, you need to start investing Rs 62,949 in a mutual fund(s) through SIP for 11 years, where you get 12 per cent annualised return on your investments.
What if you invest an amount equal to EMI in a mutual fund SIP?
In 11 years, your investment will be Rs 83,09,268, estimated long term capital gains will be Rs 82,89,546, and the estimated corpus will be Rs 1,65,98,814.
What will be the post-tax return?
Since we can't predict the long-term capital gains tax rate for the future, we can calculate it as per the current rate of 12.50 per cent. We will also consider the current exemption limit of Rs. 1,25,000 on long term capital gains.
What will be the post-tax return?
According to that calculation, the taxable income will be Rs 81,64,546. At 12.50 per cent interest rate, the estimated tax will be Rs 10,20,568.25.
What will be the post-tax return?
So, the estimated post-tax capital gains will be Rs 72,68,977.75, and the post tax total estimated amount will be Rs 1,47,68,977.75. It will easily cover the home value of Rs 1,42,37,239.
How much money will you save then?
Your repayment amount for a Rs 75 lakh loan was Rs 1,88,81,918. Your SIP investment is Rs 83,09,268, and your extra estimated amount on SIP investment is Rs 5,31,738.75.
How much money will you save then?
So, the total estimated amount you will save compared to the Rs 75 lakh loan repayment will be Rs 1,11,04,388.75.