Rs 70 Lakh Home Loan vs Rs 70 Lakh Corpus From SIP Investment: Which can be quicker way to buy dream home? Know it through calculations
Home Loan vs SIP Investment: In a home loan, a borrower repays the interest along with the principal amount over a long duration. In mutual fund SIP investment, one invests a fixed amount every investment cycle to create a corpus in the long term. It depends on an individual's requirement to choose between a home loan and the SIP investment.
Home Loan vs SIP Investment: One needs a large amount to purchase a home. There are routes such as purchasing it in cash, making a down payment, and taking a home loan for the rest of the amount. Buying a home that may cost over Rs 50 lakh in a Tier I city in cash may not be easy for a person earning over Rs 1 lakh a month. So, the obvious choice is to take a loan. But what if instead of buying a home, one starts SIP investment, creates a corpus, and then purchases the home? Let's compare the calculations of either scenario and see which may be a faster route to arrange money for buying a home.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for retirement planning.)
Buying a home loan through loan
When a borrower approaches a bank for a home loan, the lender gives them the loan for a tenure of 15 years or more. In some cases, it can stretch up to 30 years. In the longer-tenure loan, the equated monthly instalment (EMI) can be less than the EMI of the same loan when taken for a shorter duration, but the overall repayment will be much higher in the first scenario.
Let's understand it with example
Here we take the example of a Rs 65 lakh home loan, where the interest rate is 9.5 per cent and the tenures are 20 years and 30 years, respectively.
When one takes it for 20 years, the EMI is Rs 60,589, the estimated interest is Rs 80,41,247, and the estimated repayment is Rs 1,45,41,247.
Let's understand it with example
But when the same loan is taken for 30 years, the estimated EMI is Rs 54,656, the estimated interest is Rs 1,31,75,988, and the estimated repayment is Rs 1,96,75,988.
Why one may choose home loan over investment
It can be an important financial goal for someone for certain reasons. Real estate is getting expensive, and the same property may cost much more if one delays their decision to buy a home. The job market is volatile. In such a scenario, someone may want to fulfil the expensive financial goal of buying a home soon.
Why one may choose home loan over investment
If someone is in their early or mid 40s, they may not have many years before them to earn a regular income. Rents in many cities are increasing faster than the inflation rate, while the increase in an individual's income may not be in sync with increasing rents.
Why one may choose investment over home loan
If someone is in their mid-20s or early 30s, they may prefer focusing on their career rather than getting involved in the cycle of repaying a home loan. And so, they may want to create a corpus that they can use to polish their career or buy a property. If someone has just started a job, they have many more working years compared to a person in their late 30s or early 40s.
Why one may choose investment over home loan
Amid such a scenario, they may have sufficient time to make investments and buy a home. Someone may want to pay a heavy down payment for buying a home to reduce their interest amount. In such a case, their priority may be to make an investment, get a return, and use that money to make a down payment.
Calculation for home loan
We will take the example of a home loan, where the borrower is taking a Rs 70 lakh loan for 25 years at 9.5 per cent interest rate. We are assuming a 10 per cent down payment for the home. So, the estimated price of the home is Rs 77 lakh.
What will be home loan EMI?
The estimated home loan EMI for a Rs 70 lakh loan will be Rs 61,159, the estimated interest will be Rs 1,13,47,630, and the estimated repayment amount in 25 years will be Rs 1,83,47,630.
SIP investment
Here, we are taking the home loan EMI (Rs 61,159) as the monthly SIP investment amount. As far as the target amount is concerned, we will calculate the inflation-adjusted price of the Rs 77 lakh home. The annualised return on SIP investment will be 11 per cent.
What will be SIP corpus in 10 years?
The invested amount in 10 years will be Rs 73,39,080, the estimated capital gain will be Rs 60,53,964, and the estimated corpus will be Rs 1,33,93,044.
Value of Rs 77 lakh home in 10 years at 5% annual price rise
The estimated future value of the same home 10 years later will be Rs 1,25,42,488.63. After paying taxes, the SIP investment may nearly cover the expenses to buy a home.