Rs 50 lakh Home Loan vs Rs 48,000 Monthly SIP: Which can be faster route to purchase home worth Rs 55 lakh? See projections
Home Loan EMI vs SIP: Buying homes is an expensive affair. One can opt for a home loan or create a corpus through SIP in mutual funds. But which option is better and faster to buy home?
Home Loan EMI vs SIP Investment: Real estate is getting more expensive day by day, and with that, buyers are looking for big-ticket loans. But as the loan amount increases, it also burns a hole in the borrower's pocket. Specially in home loans of 20 years and over, the interest amount can surpass the principal. But if one makes a sizeable down payment and goes for a small-amount loan, repaying it can be easier. Amid such a scenario, should one go for a home loan or create a corpus to make a large down payment, or should one accumulate wealth to buy the home in one go? Know about many such possibilities and know which of the 2 options, a Rs 50 lakh home loan or investment in a mutual fund systematic investment plan (SIP) of the same amount as the loan EMI can be a faster route to buy a Rs 55 lakh home.
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Why home loan interest can be higher than principal
Let's understand it with a few examples. Here we take examples of a Rs 60 lakh loan and see in which conditions interest can be higher than principal. We are taking a 10 per cent interest rate.
Rs 60 lakh loan for 15 years
If the loan is taken for 15 years, the estimated interest will be Rs 56,05,735, and the estimated repayment will be Rs 1,16,05,735.
Rs 60 lakh loan for 20 years
But if the same person takes it for 20 years, the estimated interest will be Rs 78,96,312.
Rs 60 lakh loan for 25, 30 years
In 25 years, the estimated interest will jump to Rs 1,03,56,613, and in 30 years, it can be Rs 1,29,55,546.
Here, we see that doubling the tenure can increase the interest by more than two times.
How SIP investment can work
SIP returns are unpredictable. They can be as high as 100 per cent a year or can be negative. But in the long term, we can assume them to be stable. In the long run, the annualised SIP returns for equity funds are predicted to be 12 per cent on the basis of the sum of the country's gross domestic product (GDP) and the inflation rate.
So, let's see what an Rs 60 lakh overall SIP investment can generate in 15, 20, 25, and 30 years?
In 15 years, monthly SIP investment will be Rs 33,333. At a 12 per cent annualised return, the estimated capital gains will be Rs 1,08,19,092, and the estimated corpus will be Rs 1,68,19,032.
In 20 years, monthly SIP investment will be Rs 25,000. At a 12 per cent annualised return, the estimated capital gains will be Rs 1,89,78,698, and the estimated return will be Rs 2,49,78,698.
So, let's see what an Rs 60 lakh overall SIP investment can generate in 15, 20, 25, and 30 years?
In 25 years, monthly SIP investment will be Rs 20,000. At a 12 per cent annualised return, the estimated capital gains will be Rs 3,19,52,702, and the estimated return will be Rs 3,79,52,702.
In 30 years, monthly SIP investment will be Rs 16,666. At a 12 per cent annualised return, the estimated capital gains will be Rs 5,28,29,783, and the estimated return will be Rs 5,88,29,543.
The same overall SIP investment can generate different results because of the power of compounding.
Home Loan vs SIP investment
It depends on financial goals, flow of income, and workable years. Owning a home makes your asset; you can modify your home according to your requirements and get rid of paying home. You can get tax benefits on repaying the interest and the principal amount of the loan. SIP investment can create a corpus that can help you achieve many financial goals, including buying a home. But it is a market-linked investment, and so it is risky. Second, you need to be consistent in investing irrespective of your financial situation.
Home loan vs SIP investment calculations
We will show the example of a Rs 50 lakh home loan. We assume that at a 10 per cent down payment, the cost of the home is Rs 55 lakh. The loan tenure will be 25 years, and the interest rate will be 9.5 per cent. We will take the average yearly home price rise as 5 per cent.
Home loan vs SIP investment calculations
On the other hand, we will show the monthly SIP investment amount the same as the home loan EMI. We will take a 10 per cent annualised SIP return and 10 years as the investment period.
Home loan
The estimated EMI 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.
Value of Rs 55 lakh home in 12 years
At a 5 per cent price rise, the value of Rs 55,00,000 home will increase to an estimated Rs 94,06,866.
SIP investment in 10 years
At a Rs 48,053 monthly SIP investment for 10 years, the total investment will be Rs 57,66,360, estimated capital gains will be Rs 41,59,084, and the estimated corpus will be Rs 99,25,444.
Post tax return
After a tax exemption of Rs 1,25,000, estimated tax on the corpus will be Rs 5,68,882.4, and the post tax expected amount will be Rs 93,56,561.6. The amount is nearly the price of home.