Home Loan Hack: Is a Rs. 2,000 SIP Enough to Make Your 40 Lakh Loan Interest-Free?

For many people, buying a home is a dream or life goal, but it is not easy to buy a home nowadays due to inflation and the high prices of real estate, so people have to go for home loans (EMIs).

On the other hand, SIPs are a very popular investment option. So it can be difficult for investors to choose between home loan EMI or investing in SIPs for their financial goal.

This confuses people about whether they should choose SIP or EMI for their goal. At the end of the blog, you will be no more confused.

What is EMI in a Home Loan?

Nowadays not everyone has that much money to buy a house in cash so they have to consider other options like a Home loan, (you might have heard some words like Home loans and EMIs).

EMI (Equated Monthly Installment) in a home loan is as if your monthly payments for a rental house, but instead of paying just to live in a house, you`re also paying to own it.

Initially, most of your EMI goes towards interest because that`s a bigger chunk of what you owe.

Let`s say you borrow Rs.30 lakhs for your home loan at 8.5% interest for 20 years, your EMI would be around Rs.26,035 per month. As you pay EMI over the period, you eventually own the house.

What is SIP?

SIP stands for Systematic Investment Plan.

This is an investment method in which the investor invests a fixed amount of money regularly on a monthly, weekly or daily basis to purchase mutual fund units.

SIPs help investors save regularly at lower amounts while enjoying the long-term benefits of rupee-cost averaging.

Rupee cost averaging means investing at different market levels, which reduces the impact of market volatility and reduces the average cost of investing.

EMI Vs SIP Key Differences:

Home Loan EMI is a set monthly payment you must make regardless of your income or spending. SIP is a flexible option that can be started with a small amount, stopped, or changed the amount at any moment based on your financial condition.

Home Loan EMI is how you pay off the loans in installments, whereas SIP creates your wealth over time.

With Home Loan EMI, you can get tax benefits under Sections 80C and 24 of the Income Tax Act, but SIP only provides tax benefits if you invest in ELSS mutual funds.

Home Loan EMI has a set interest rate on the amount that is borrowed, while SIP`s return rate is based on the mutual fund scheme`s performance.

While a Home Loan EMI helps you own a home, SIPs provide the potential for wealth creation. When it comes to EMI and SIP, each has its benefits as well as drawbacks.

Let`s say, You have a home loan of Rs.40 lakh for 20 years at an interest rate of 9%.

So, There are 3 approaches that seek to create profits that equal the interest paid on the house loan.

This makes the house financing interest-free

1. No Investment:

This strategy is chosen by the majority of the people.

You can guess what`s in this option, you just have to pay the EMIs which is Rs.33,458 & not invest any amount for the entire 20 years, with the 8% interest rate. So, the total loan amount with interest would be Rs.80,29,825 & interest will be Rs.40,29,825.

2. Invest 10% of EMI:

This strategy is very crucial for people who want to make their loan interest-free.

With this option, You pay the regular monthly Rs.35,989 EMI & besides that, you have to start investing 10% of the EMI which is around Rs.3500 per month for the same loan tenure of 20 years with a return of 15%.

So, with that, your maturity amount will be Rs.53,05,842.

3. Top Up SIP:

In this strategy, a person starts SIP with Rs.2,000 and Increases the 5% amount of SIP every year. You just invested Rs.7,93,583 amount in 20 years which is same as your loan’s tenure

With the power of compounding the maturity amount will be Rs.40,11,915 which is close to your Home Loan Interest with a return of 15%.

Conclusion:

Home loan EMIs and SIPs serve different purposes.

EMIs help you own a home over the period but come with a fixed annual interest rate you have to pay. You also get the tax benefits.

SIPs help you grow your wealth over time. SIPs are effective because it is flexible & adjustable based on your financial situation. So, should you choose SIP over EMI?

There`s no single right answer - it depends on your financial situation. If your goal is to own a home, then focus on home loan. If you want to build wealth for the future, then start investing in SIP.

You can even combine both EMI + SIPs, as we talked about earlier, like starting by investing 10% of EMI or Investing Top up SIPs. So, you can at least make your loan interest-free or sooner you pay your debt.

If you have some doubts consult your financial advisor or contact us now.