Ever feel the pressure to ditch the rent and buy a house? The story plays out everywhere – “Beta, it’s time to settle down, buy a house! How long will you throw away money on rent?”
But the story doesn’t end there. Once that dream house is purchased, a new goal takes hold: paying off the home loan as quickly as possible. How can you achieve this dream?
The Strategy
Vihaan’s Approach: The Standard 20-Year Loan
Vihaan takes a home loan of ₹1 crore for 20 years. Here’s the breakdown:
- EMI: ₹86,782 per month.
- Interest Paid: Over 20 years, a whopping ₹1.08 crore in interest.
- Total Repayment Amount: ₹2.08 crore (principal + interest) over 20 years.
Aisha’s Approach: Extended 30-Year Loan with SIP Investment
Aisha explores an alternative strategy:
- Extend the Loan Tenure: She extends the loan tenure to 30 years.
- Reduced EMI: This lowers her EMI to ₹76,890, saving ₹9,892 per month.
- Invest the EMI Difference: Instead of spending this extra, Aisha invests it in a Mutual Fund SIP with an average annual return of 12% (historical data suggests equity SIPs can offer such returns).
The Impact After 18 and 20 Years
After 18 Years
One key benefit of Aisha’s approach is the potential to repay the loan early. Here’s how:
- Outstanding Loan Amount: ₹69,26,802 after 18 years.
- SIP Corpus After 18 Years: ₹71,17,286.
At the end of year 18, Aisha can use her SIP corpus to pay off the remaining loan and still have ₹1,90,484 left. This allows her to close the loan two years early and save even more on interest.
After 20 Years
Let’s compare the situations after 20 years:
Vihaan
- Loan Paid Off: Home loan is fully repaid.
- Total Interest Paid: ₹1.08 crore.
- Total Repayment Amount: ₹2.08 crore.
Aisha
- Outstanding Loan Amount: ₹62,01,631 after 20 years.
- SIP Corpus After 20 Years: Approximately ₹91,98,574.
Aisha can now use her SIP corpus to pay off the remaining loan amount. Even after using ₹62,01,631, she’s left with approximately ₹30 lakh!
Comparing Strategies
Both strategies pay off the loan in 20 years. However, Aisha’s approach allows her to:
- Have an additional ₹30 lakh left after using her SIP corpus.
- Potentially clear the loan even earlier (in 18 years) and still have some funds remaining.
Why It Works: Building Wealth While You Become Mortgage-Free
Aisha’s approach offers a compelling strategy for achieving homeownership and financial goals simultaneously. Here’s how:
- Lower EMIs, Higher Investments: Extending the loan tenure frees up money each month. By investing this difference in an SIP, you can grow your wealth over time.
- Fast-Track to Freedom: This strategy allows you to potentially pay off your mortgage in as little as 18 years. This frees you from monthly payments and gives you more financial flexibility sooner.
- Build Wealth: By strategically combining a longer loan tenure with SIP investments, you can achieve both goals: becoming mortgage-free in 20 years and accumulating significant savings (like ₹30 lakh).
Important Considerations
- Market Fluctuations: SIP returns are not guaranteed. Research and choose a plan with a risk profile that suits you.
- Discipline is Key: Sticking to your SIP contributions is crucial for the strategy’s success.
Conclusion
So, the next time the pressure to buy a house mounts, remember, that there’s a smarter way to achieve homeownership and build wealth simultaneously.
Want to pay off your home loan faster AND build wealth? This strategy could help! Get started with a free personalized plan tailored to your goals. Schedule your free consultation to discuss this strategy.
Additional Reading – https://theprudentinvestor.in/home-loan/
