Home Loan vs SIP: Buy home with Rs 55 lakh loan now or create Rs 3.48 cr corpus in 25 years; know maths of both options
Home Loan vs SIP Investment: In a home loan, a borrower pays an interest amount along with the principal amount. In SIP investment, they invest a fixed amount in a mutual fund scheme and generate a corpus.
Home Loan vs SIP investment: Home loan or SIP investment? Which option should one go for? They can choose as per their requirements, priorities in life, monthly income, and age. In an early professional career, one has time to make investments and generate a corpus, but in their 40s, one doesn't have many years left to earn a regular income. With the corpus created, early starters can achieve many of their financial goals, including buying a home. In 40s, the planning can be different?
Photos: Unsplash/Pixabay
(Disclaimer: This is not investment advice. Do your due diligence or consult an expert for financial planning.)
What happens in home loan?
Since real estate is expensive, home loans are high ticket. The home loan tenure is also from 15-30 years. In such a long loan tenure, the interest amount is more than the principal amount.
Can interest amount be reduced?
Extra down payment, prepayment, and paying an additional EMI are some of the ways to reduce the interest amount significantly. Prepayments can also cut loan tenure.
What happens in SIP investment?
In SIP, one invests a fixed amount in a mutual fund scheme. The SIP can be daily, weekly, monthly, quarterly, half-yearly, or annually. They can also increase the amount periodically. Investors get return on the invested amount. Because of compounding, the corpus is likely to grow faster as it gets older.
What are SIP returns?
Annualised SIP return are extended internal rate of return (XIRR), where returns of different durations are calculated and their average is calculated. Mutual fund investors get higher return in equity funds than in hybrid and debt funds, but equity funds are the most risky of the three.
Home loan conditions
We will take the example of Rs 55 lakh home loan for 25 years at 9.50 per cent.
What will be EMI and interest?
The estimated EMI for the loan will be Rs 48,053, the estimated interest will be Rs 89,15,995, and the estimated repayment will be Rs 1,44,15,995.
SIP investment
Our SIP investment amount will be the same as the loan amount - Rs 55 lakh. We will spread it to 25 years for monthly SIP investment. The annualised rate of return will be 12 per cent.
What will be monthly SIP investment?
The monthly SIP investment will be Rs 18,333.
What will be SIP returns?
At 12 per cent annualised return, the estimated corpus generated from Rs 18,333 monthly SIP investment will be Rs 3,47,89,344.
What if annualised SIP corpus growth is 10%?
At 10 per cent annualised growth, the estimated corpus will be Rs 2,45,27,544.