Home loan EMI vs SIP: Which can be a faster route to Rs 65 lakh to buy home? See calculations to know
Home loan EMI vs SIP: Should one take a loan to buy a home or make an SIP investment, create a corpus, and then buy a home? It depends on priorities and financial goals. Both have their pros and cons.
Home loan EMI vs SIP: Aiming to buy a home? Should you take a loan? Or should you wait, and instead of repaying equated monthly instalment (EMI) of the loan, should you start a SIP investment, build a corpus, and then buy a home? When you need a sizeable amount to achieve any of your financial goals, such questions can often pop up. You may be confused or find it difficult to come out of such a situation. You may think that home is a priority, and since you need a lot of money to buy a home, you should take a loan and fulfil it first. But home loans are for long durations, and you become the owner of the home only after repaying the loan.
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(Disclaimer: This is not financial planning advice. Do your own due diligence or consult an expert for financial planning.)
Will you pay rent?
The other factor that can motivate you to buy a home is the rent of the property you are staying in. Rents in Tier I and Tier II cities are sky-high and rising fast. So, delaying a home purchase means paying lakhs of rupees in rent for years.
Rising price of property
The other factor is the rising price of real estate. If we take a 5 per cent average price rise, a Rs 50 lakh home will cost Rs 81.45 lakh in 10 years.
High interest amount on home loan
But if one takes a home loan, and the duration is 20 years or more, they also pay a higher interest than the principal amount. Take the example of a Rs 55 lakh home loan for 20 years at 9.50 per cent interest rate. The estimated interest will be Rs 68,04,132. If the same loan is for 25 years, the estimated interest will be Rs 89,15,995.
What's the other way out?
The other way out can be to delay the decision of buying a home, make an investment, create a corpus, and purchase a home.
Home loan or investment: How to decide?
It can depend on the financial goals, priorities, the age of the person, and the income flow. E.g., a 25-year-old has much more time compared to a 40-year-old to accomplish financial goals. For a 40-year-old, priorities can be completely different than those of a 25-year-old. So, both may take a different approach to achieve the same financial goal.
Maths of home loan and SIP investment
We will show two calculations here. The first calculation will be about a Rs 65 lakh home loan for 25 years at 9.5 per cent interest rate. In the second calculation, we will show how the SIP investment of the same investment as the EMI can create a corpus that can cover the loan amount.
EMI on Rs 65 lakh home loan
The estimated EMI on the loan will be Rs 56,790, the estimated interest will be Rs 1,05,37,085, and the estimated repayment will be Rs 1,70,37,085.
SIP investment
We will pick Rs 56,790 as the monthly SIP investment. The rate of the annualised return will be 12 per cent.
Corpus in 10 years
In 10 years, the invested amount will be Rs 68,14,800, estimated capital gains will be Rs 63,79,736, and the estimated corpus will be Rs 1,31,94,536.
Value of Rs 70 lakh in 10 years
We assume a 10 per cent down payment for the home loan. So, if the home loan is Rs 70 lakh, the estimated worth of the home is Rs 77 lakh. We are excluding the processing fee and the stamp duty. We will calculate the inflation-adjusted value of Rs 77 lakh in 10 years. We are taking 5 per cent annual price rise for the home. The value of Rs 77 lakh in 10 years will be Rs 1,25,42,489.
Will SIP investment cover home value?
After paying tax on the SIP corpus, the investment can nearly cover the value of the home.