Rs 48,053 Home Loan EMI vs Rs 48,053 SIP: Buying a home is an important financial goal and many individuals.
Most people want to accomplish this goal when they are in a job and earning regularly.
It is because buying a home through a loan is a long-time commitment, and the borrower needs a sizeable amount from their monthly income to pay off equated monthly instalment (EMI) on time.
Or, if they want to buy through an investment, they need a long-term planning to generate a corpus, and make a large down payment or buy the property in cash.
How do interest and principal repayments of a home loan work?
Which may be the right choice—to take a home loan or start an SIP investment; and which of the 2 options—Rs 48,053 Loan EMI or a Rs 48,053 SIP investment—can be the faster route to buy a Rs 61 lakh loan? Know here-
Home loan conditions
The loan duration of a home loan can be 15-30 years.
Home loan borrowers choose the loan tenure as per their income.
As far as the interest rate is concerned, the lender decides it on the basis of the borrower’s credit score, income flow, debt-to-income ratio, etc.
How tenure impacts EMI
Paying EMI is tough; one needs a substantial amount for its regular payment. Borrowers adjust their EMI according to their income, but having a slightly larger EMI can help one repay the loan sooner than if they choose a lower EMI.
It can also help them save a substantial amount on the interest payment. Let’s see its example.
Rs 60 lakh home loan for 20, 25, and 30 years
If we take a Rs 60 lakh home loan at a 9.5 per cent interest rate for 20, 25, or 30 years, the EMI amount will decrease with a rise in duration, but the interest payment will increase.
If we take it for 20 years, the estimated EMI will be Rs 55,928, the estimated interest will be Rs 74,22,689, and the estimated repayment will be Rs 1,34,22,689.
If we take it for 25 years, the estimated EMI 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.
If we take it for 30 years, the estimated EMI will be Rs 50,451, the estimated interest will be Rs 1,21,62,451, and the estimated repayment will be Rs 1,81,62,451.
You can see how a difference of a few thousand rupees in EMI can save almost Rs 50 lakh on a Rs 60 lakh loan.
How SIP investment work
In a home loan, a shorter duration and a higher EMI amount can save a substantial amount.
However, in an SIP investment, a small investment for long years can create a large corpus because of the compound growth of the invested amount.
Rs 10,000 SIP investment for 15 years, 30 years
At a 12 per cent annualised return, a Rs 10,000 monthly SIP can create an estimated corpus of Rs 50,45,760 on a Rs 18,00,000 investment.
But if it is continued for a total of 30 years, the estimated corpus will grow to Rs 3,52,99,138 on an investment of Rs 36,00,000.
The faster growth in the second half is because of compound growth, which speeds up with time.
Should one take home loan or start SIP?
The choice may depend on an individual’s financial goals, urgency to buy it, years left in earning, etc.
A person who is in their early career has more years to earn money than a person in their early 40s with fewer years to earn a regular income.
The other factors can be liabilities such as other loans.
Home loan calculation
We will take the example of a Rs 55 lakh home loan at a 9.5 per cent interest rate for 25 years.
What will be EMI and interest?
The estimated EMI will be Rs 48,053, the estimated interest amount will be Rs 89,15,995, and the estimated repayment will be Rs 1,44,15,995.
Home price
We assume that a person is making a 10 per cent down payment and taking the loan for the 90 per cent of the amount.
By that calculation, the current price of property will be nearly Rs 61 lakh, where Rs 55 lakh is the loan amount.
What will be SIP investment conditions?
We will make an SIP investment for 11 years, where the annualised rate of return is 10 per cent. The monthly SIP investment will be the same as the EMI- Rs 48,053.
What will be SIP corpus in 11 years?
In 11 years, the total investment will be Rs 63,42,996, estimated capital gains will be Rs 52,30,617, and the estimated corpus will be Rs 1,15,73,613.
What will be home price in 11 years?
We assume a 5 per cent annual price rise in property. So, a Rs 61 lakh home will cost an estimated Rs 1,09,54,724 in 11 years.
It shows that in 11 years, the SIP investment may cover the home price even if the investment grows at a10 per cent.
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
