Even though the entire bank and financial industry is working to make EMI borrowing and interest paying better, wouldn't it be great if you could just save all your interest money that you pay as home loans?
Is it actually possible? Yes, the best way to save your interest is by investing in Mutual Funds through Systematic Investment Plan (SIP). Systematically, homes are bought on funding from banks or any other financial institution and the customers pay an applicable EMI every month for a fixed tenure. In a SIP, you choose to invest a small amount regularly that can be as low as ₹500 per month. Since Equity Mutual funds have been giving around 15% returns for the past 20 – 25 years, they should help you to pay back your loans.
Let us consider that you take a loan of ₹10,00,000 at 8.35% for 20 years. You have to pay Rs. 8,583 EMI and at the end of 20 years, the interest you would pay to the bank is ₹10,60,040.
And let us say, you have invested Rs. 1000 (Less than 1/8th of EMI) every month for the same 20 years, you would end up having ₹2.4 L as principal and at 15%* you would see your fund grow to ₹15,15,995. Excluding your principal of ₹2.4 L, you would still have ₹12,75,995 as your earnings which are about ₹2,00,00 more than your home loan interest (₹10,60,040). The below chart helps you understand the difference in returns you receive via SIP and the interest amount you pay to the bank.
Clearly, SIP has scored better returns even if you invest just ₹1000 every month, as compared to paying ₹8583 per month for a loan of ₹1000000 over a course of 20 years.
So if you are planning to buy a home loan, opt for the maximum tenure the bank offers you even if you are financially able to pay off in lesser time. For example, if you are capable of paying the loan back in 15 years but the bank offers you 25 years, it is best to go with 25 years. This way, you end up paying lower EMI every month and you can use the monthly savings to invest in SIP of a diversified equity fund.
In case you already have bought a home loan plan, you can still implement this idea by requesting the bank to extend the tenure or transfer the loan from one bank to another and in the process of doing so, choose the maximum tenure available.
- Selecting the maximum tenure offered by the bank and investing in SIP can help you to save the interest amount you pay for your loans.
- Don't be in a hurry to buy a home loan plan to afford a house during your years of high savings.
- Don't use all your surplus money to pay back your EMIs than wha
- t is required every month.