Larger Home Loan EMI vs SIP Investment: Which option can recover Rs 1.30 crore interest of Rs 80 lakh, 25-year loan; see calculations to know that
Home Loan EMI+SIP: While repaying a home loan, investing in a SIP can help one recover the amount of interest to a great deal. Even if their monthly SIP investment is 12 per cent-14 per cent of the EMI amount, it can create a large amount during the investment period.
Bigger Home Loan EMI vs SIP Investment: Real estate is expensive, and for a salaried-class person, it is extremely difficult to buy a home in one go. That's the reason a lot of people depend on a home loan to realise their dream of owning a home. When they take a home loan, it is for at least 15 years or more. In that long duration, they often end up paying more interest than the principal amount. In the initial years of repaying the loan, it may be difficult for a borrower to manage the equated monthly amount (EMI), but as their income increases, they may find it easy to manage that EMI.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What options borrower has then
At that stage, the borrower has the option of either increasing their EMI amount, repaying the loan, or paying an additional EMI. Either option reduces their interest, and they can repay their loan earlier than the stipulated period.
Investment options
But if they want, they can also choose to make an investment simultaneously with repaying their home loan. In this write-up, we will show how SIP investment of just 14.30 per cent amount of the EMI can recover the interest amount of the loan.
Home loan
We are taking the example of a Rs 80 lakh loan for 25 years. The interest rate for this loan will be 9.5 per cent.
What will be home loan EMI?
The home loan EMI will be Rs 69,896.
What will be interest and repayment?
The estimated interest will be Rs 1,29,68,720, and the estimated repayment will be Rs 2,09,68,720.
SIP investment condition
The monthly SIP amount will be 14.30 per cent of the EMI amount. Since it is difficult to start investment along with the EMI from the first year of the loan, we will start the Rs 10,000 monthly SIP from the 4th year. While the loan tenure will be 25 years, the SIP investment duration will be 22 years.
SIP investment in 22 years
At 10,000 monthly SIP, the total investment in 22 years will be Rs 26,40,000.
SIP corpus in 22 years
The estimated capital gains will be Rs 1,03,18,959, and the estimated corpus will be Rs 1,29,58,959.
What if borrower increases EMI amount?
Instead of investing in SIP, if one increases their monthly EMI by Rs 10,000 from the fourth year of the loan tenure, the estimated interest saved will be Rs 50,25,073.
What will be new home loan tenure?
The loan tenure will also reduce from 300 months to 200 months (over 8 years).
What should one do?
It depends on the borrower's choice- whether they are comfortable with a simultaneous investment for the entire loan tenure, or they want to repay the loan earlier than its oroginal duration.