Rs 52,111 Home Loan EMI vs Rs 52,111 SIP: Which can be faster path to purchase Rs 60 lakh home
Rs 52,111 EMI vs Rs 52,111 SIP: Most home buyers rely on a home loan to achieve their financial goal. However, some prefer making an investment to taking a loan. They build a corpus to purchase a house. But which is a better option? Which can be a faster way to purchase a Rs 60 lakh home? See calculations to know–
Rs 52,111 EMI vs Rs 52,111 SIP: Buying a home is an important financial goal. It costs a bomb given the rising price of property. As a result, a lot of people rely on a home loan to purchase one. The other way around can be to delay the decision of taking a home loan. Rather, start an investment, create a corpus, and buy a home from it. If the amount is not sufficient, it can be used to make a heavy down payment, which will help reduce repayment of the home loan to a great extent. But what is a better choice – taking a loan or starting an investment? If you want to buy a Rs 60 lakh home, which can be a better option: to take a Rs 54 lakh loan or make an SIP investment which is equal to the EMI amount of the home loan? See calculations to know –
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(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Buying home through a loan
A home loan can be a fixed interest rate or a floating rate. While in a fixed interest rate, the EMI amount remains the same throughout. In a floating rate loan, the interest rate is repo rate-linked, which can change if the repo rate changes. Since buying a home is a costly affair, most buyers, specially in Tier I and Tier II cities, take a home loan to achieve this goal.
Important factors in home loan
While the interest rate is an important factor in a home loan, the loan tenure is another vital factor. The longer duration of the same loan can increase the overall repayment amount significantly. See a couple of examples!
Rs 50 lakh home loan for 20, 25, 30 years
Here we are taking the example of a Rs 50 lakh loan where the interest rate is 10 per cent. Let's see the estimated equated monthly instalment (EMI), interest amount and repayment if the same loan is taken for 20, 25 or 30 years.
In 20 years, the estimated EMI will be Rs 48,251, the estimated interest will be Rs 65,80,260 and the estimated repayment will be Rs 1,15,80,260.
Rs 50 lakh home loan for 20, 25, 30 years
In 25 years, the estimated EMI will be Rs 45,435, the estimated interest will be Rs 86,30,511 and the estimated repayment will be Rs 1,36,30,511.
In 30 years, the estimated EMI will be Rs 43,879, the estimated interest will be Rs 1,07,96,288 and the estimated repayment will be Rs 1,57,96,288.
It shows that the tenure increases or reduces the estimated repayment amount significantly.
Investment for buying home
While a home loan is one way to buy a home, the other way around can be to invest the same amount in a fixed interest rate or a market-linked instrument and generate a corpus. Such an investment can also be a systematic investment plan (SIP) in a mutual fund. One can purchase the home in one go, or they can also make a heavy down payment to reduce the loan burden.
SIP return
The investment return may depend on the type of mutual fund one invests their amount in. An equity fund can give a high return but can also be highly risky. A hybrid fund can be moderately risky but may give a lower long-term return than an equity fund. A debt fund is the least risky but also gives the least long-term annualised return of all 3 fund categories
SIP investment for buying home
When one is planning to buy a home through an SIP investment, two important factors are in how many years they want to buy it and what the property price will be in that particular year. Based on these two factors, one may choose their mutual fund type and the monthly SIP amount.
Example of SIP investment
Let's say you want to buy a property in 10 years whose current price is Rs 50 lakh.
At a 5 per cent annual rise, the property price will be Rs 81,44,473 in 10 years. So, that will be the target amount.
To achieve that target at a 10 per cent annualised SIP return, one needs to make a monthly estimated SIP investment of Rs 40,500.
SIP or home loan?
There is no fixed solution for that. It depends on an individual's financial goals, their present age, and earning years. One may think of creating a corpus and then purchasing a home if they are in their early career, but if one has a family and doesn't have many working years, they may prefer buying a home.
Story calculations
We are taking the property amount of Rs 60 lakh and the loan amount of Rs 54 lakh; we are expecting a 10 per cent down payment. The Rs 54 lakh home loan will be taken at a 10 per cent interest for 20 years. For SIP calculation, we will take the same amount as for EMI.
EMI, repayment for Rs 54 lakh home loan
The estimated EMI for such a loan will be Rs 52,111, the estimated interest will be Rs 71,06,681 and the estimated repayment will be Rs 1,25,06,681.
Home value in 10 years
Since we are assuming Rs 60 lakh as the current price of the home and expecting a 5 per cent annual price rise, the estimated value of the same loan in 10 years will be Rs 97,73,368. This is the investment amount we are targeting in 10 years.
SIP investment
Our monthly SIP investment will be Rs 52,111, and the expected annualised return will be 10 per cent. We will make this investment for 10 years.
In 10 years, the total investment will be Rs 62,53,320, estimated capital gains will be Rs 42,44,837 and the estimated corpus will be Rs 1,04,98,157.
Such an amount, post-tax, may cover the home cost.