Bigger Home Loan EMI vs SIP Investment: Which one is better for Rs 60 lakh, 25-year loan? This example will blow your mind
Bigger Home Loan EMI vs SIP Investment: When a borrower repays a home loan, they pay higher interest than the principal amount because such loans are of high amounts and have long durations. But if they go for a higher EMI, the interest amount can be reduced considerably. The other option to recover the interest paid is to have a mutual fund SIP investment.
Bigger Home Loan EMI vs SIP Investment: How does a home loan work? One takes a loan, which is most likely of a high amount and is taken for long durations, such as 20 years or over. They pay a higher interest than the principal amount. Some of the options to reduce interest are to go for a higher down payment, pay an additional EMI, have a bigger equated monthly instalment (EMI), or make a prepayment(s). The other method to lessen the impact of the interest amount is to make a simultaneous SIP investment in a mutual fund scheme along with repaying the home loan EMI. In this write-up, we will compare between the two scenarios- paying the home loan EMI while investing in a mutual fund scheme versus going for a bigger EMI.
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(Disclaimer: Our calculations are projections and not investment advice. Do your own due diligence or consult an expert for financial planning.)
Home loan conditions
We are taking the example of a Rs 60 lakh home loan for 25 years at an interest rate of 9.5 per cent.
What will be EMI and interest?
The estimated EMI for such a loan will be Rs 52,422, the estimated interest will be Rs 97,26,540, and the estimated repayment will be Rs 1,57,26,540.
What will be SIP investment?
Here, we will go with a monthly SIP, which will be 10 per cent of the EMI amount. So, the monthly SIP amount will be Rs 5,250.
Return and duration for SIP investment
The SIP will be run for 25 years, and the expected annualised return on this investment will be 12 per cent.
What will be SIP corpus in 25 years?
The invested amount will be Rs 15,75,000, estimated capital gains will be Rs 73,61,585, and the expected amount will be Rs 89,36,585.
What if we go for bigger EMI instead of SIP investment?
Instead of going for SIP investment, if we add the SIP investment amount (Rs 5,250) to the existing EMI amount (Rs 52,422) and add Rs 5 more to it, the new EMI amount will be Rs 57,671.
What if we go for Rs 57,671 EMI?
In that case, the estimated home loan interest will be cut from Rs 97,26,540 to Rs 66,88,721, and the estimated repayment from Rs 1,57,26,540 to Rs 1,26,88,721.
What will be new loan duration?
Not only over Rs 20 lakh will be saved, the loan duration will also be cut 25 years to 18 and 4 months.
What is better- bigger home loan EMI or SIP investment
It depends on an individual's financial goals. We can't say if something is better or worse for an individual.