25-year Home Loan vs 10-year SIP investment: Which can help one reach faster to purchase Rs 55 lakh home; see calculations
25-year Home Loan vs 10-year SIP investment: People take home loans for a long term, so their estimated interest can be quite higher than the principal amount. In SIP investment, they can invest either a fixed amount or increase it step by step to create a corpus that may also be used to buy a home.
25-year Home Loan vs 10-year SIP investment: Home loans are large tickets. For the masses, it is nearly impossible to buy a home with a one-time payment. So, they take a loan to buy it. Since the home loan amount is large, they take it for long durations such as 15, 20, 25, or 30 years. The longer the loan tenure is, the higher the repayment amount. So, to reduce the loan burden, they either need to go for a large down payment, or if they want to deposit the basic down payment of 10 per cent, they can use options such as prepayment to reduce the loan amount.
The other way to arrange money to buy a home can be to start an investment such as a systematic investment plan (SIP) in a mutual fund. But when you opt not to buy a home, you pay rent; you don't take tax benefits on home loan principal and interest repayment, plus the price of the property also keeps rising.
What should one do in such a case: take a home loan or start an SIP investment?
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Home loan vs SIP: Assess your priorities
See how urgent it is to buy a home for you. Factors such as how many working years you have in your job: Is your job transferable? How much tax benefit on a home loan will you avail yourself of (though tax policies may change), and what is the alternative to arrange money for buying a home?
Benefits of taking home loan
You own a property on the completion of the home loan. Once you shift to your home, you save a lot on rent. Since real estate is getting expensive, owning a home gives you the psychological comfort of accomplishing an important financial goal. You can modify your home as per your wish, which you are likely to be permitted in a rented property.
Benefit of investment
If one starts a SIP investment, they can invest as per their convenience, where they can start with a small amount and increase it as their income rises. While a home loan, they need to repay a minimum fixed EMI. Investment gives you the freedom to choose investment schemes as per your financial goals. You can change the strategy and switch the investment schemes as per your financial goals. If you are in your 20s, you can use those years to generate a corpus, which may help you buy a home with a huge down payment or a one-time payment.
Home loan calculation
For our story, we will take the example of a Rs 50 lakh home loan, where at a 10 per cent down payment, the price of property is Rs 55 lakh. The home loan interest rate is 9.5 per cent, and the tenure is 25 years.
What will be home loan EMI?
The estimated home loan EMI will be Rs 43,685.
What will be interest and repayment?
The estimated interest will be Rs 81,05,450, and the estimated repayment will be Rs 1,31,05,450.
What will be SIP investment?
We will take the same amount as EMI (Rs 43,685) for monthly SIP investment. The duration will be 10 years, and the estimated return will be 12 per cent.
What will be SIP corpus in 10 years?
The total investment in 10 years will be Rs 52,42,200, estimated capital gains will be Rs 49,07,533, and the estimated value will be Rs 1,01,49,733.
|
Year
|
Invested Amount | Wealth Gained | Expected Amount |
| 2024 | ₹ 5,24,220 | ₹ 35,355 | ₹ 5,59,575 |
| 2025 | ₹ 5,24,220 | ₹ 1,06,324 | ₹ 11,90,119 |
| 2026 | ₹ 5,24,220 | ₹ 1,86,293 | ₹ 19,00,632 |
| 2027 | ₹ 5,24,220 | ₹ 2,76,403 | ₹ 27,01,255 |
| 2028 | ₹ 5,24,220 | ₹ 3,77,942 | ₹ 36,03,417 |
| 2029 | ₹ 5,24,220 | ₹ 4,92,359 | ₹ 46,19,996 |
| 2030 | ₹ 5,24,220 | ₹ 6,21,286 | ₹ 57,65,502 |
| 2031 | ₹ 5,24,220 | ₹ 7,66,566 | ₹ 70,56,288 |
| 2032 | ₹ 5,24,220 | ₹ 9,30,269 | ₹ 85,10,777 |
| 2033 | ₹ 5,24,220 | ₹ 11,14,736 | ₹ 1,01,49,733
|
What will be tax amount on this corpus?
In SIP investment, the tax is calculated on a first-in-first-out basis, where SIPs held for over a year will attract long-term capital gains after a standard deduction of Rs 1.25 lakh. SIPs held for less than a year will be treated for short-term capital gains.
What will be short- and long-term capital gains?
In our SIP calculations, estimated long-term capital gains are Rs 37,92,797, while estimated short-term capital gains are Rs 11,14,736.
What will be total tax?
Total estimated tax after Rs 1,25,000 exemption on long-term capital gains will be Rs 6,81,421.
Estimated SIP corpus after deducting tax
The estimated amount after deducting tax will be Rs 94,68,311.
What will be price of Rs 55 lakh home in 10 years
At a 5 per cent inflation rate, the estimated value of a Rs 55 lakh home in 10 years will be Rs 89,58,920. The estimated SIP return, thus, can cover the home value.
What we are not counting here
We are not counting here the estimated rent a person will pay in 10 years and the income tax benefit they can get on home loan principal and interest repayment in 10 years.