Rs 55 Lakh Loan vs Rs 48,053 SIP: Which can be faster route to buy home worth Rs 61 lakh? See calculations
Rs 48,053 EMI vs Rs 48,053 SIP: When we repay a home loan, we pay off interest along with principal for years, in a SIP investment, we create a corpus from compound growth. What if one chooses either of them to buy a home?
Rs 55 48,053 vs Rs 48,053 SIP: Buying a home is an important goal and an ambition for many. Most people want to achieve this goal when they are earning. It is because buying a home through a loan is a long-time commitment, and the borrower takes out a sizeable amount from their monthly income to pay off equated monthly instalment (EMI). Or, if one is in their early stage of their earning years, they may also start an investment, generate a corpus, and make a large down payment or buy the property in one go. 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—Rs 48,053 Loan EMI vs Rs 48,053 SIP—may be a faster route to purchase a Rs 61 lakh loan? Know here-
Photos: Unspalsh/Pixabay
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
Home loan conditions
The loan duration of a home loan can be anywhere from 15-30 years. Home loan borrowers can choose the loan tenure as per their repayment capacity. As far as the interest rate is concerned, the lender decides it, taking the borrower's credit score, income flow, debt-to-income ratio, etc., into account.
How tenure impacts EMI
Paying EMI is tough as it may eat out a substantial portion from income. Borrowers adjust their EMI according to their income, but having a slightly larger EMI can help one repay the loan quicker than if they go for a lower EMI. Having a larger EMI can also help one save a substantial amount on the interest payment. Let's understand it with an example.
Rs 60 lakh home loan for 20, 25, and 30 years
If we take a Rs 60 lakh loan at a 9.5 per cent interest rate for 20, 25, or 30 years, our EMI amount will decrease with a rise in duration, but the interest amount will increase.
When we take it for 20 years, the estimated EMI is Rs 55,928, the estimated interest is Rs 74,22,689, and the estimated repayment is Rs 1,34,22,689.
Rs 60 lakh home loan for 20, 25, and 30 years
When we take it for 25 years, the estimated EMI is Rs 52,422, the estimated interest is Rs 97,26,540, and the estimated repayment is Rs 1,57,26,540.
When we take it for 30 years, the estimated EMI is Rs 50,451, the estimated interest is Rs 1,21,62,451, and the estimated repayment is 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 works
In a home loan, a shorter duration and a higher amount of EMI can save a substantial amount. However, in an SIP investment, a small investment for long years can create a large corpus because of compound growth of the invested amount.
Rs 10,000 SIP investment for 15 years
At a 12 per cent annualised return, a Rs 10,000 monthly SIP can generate an estimated corpus of Rs 50,45,760 on an investment of Rs 18,00,000.
Rs 10,000 SIP investment for 30 years
But if it is continued for 15 more 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?
There can't be the same rule for everyone. The choice may depend on an individual's financial goals, family situation, years left in earning, etc. A person who is in their early years of their career has more years to earn money than a person in their early or mid-40s with fewer years to earn a regular income. The other factors can be liabilities such as other loans.
Home loan calculations
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 will be Rs 89,15,995, and the estimated repayment will be Rs 1,44,15,995.
Home price after 11 years
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 logic, 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 will be 10 per cent. The monthly SIP investment will be the same as EMI- Rs 48,053.
What will be SIP corpus in 11 years?
The total investment in 11 years 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 purchase price even if the investment grows at 10 per cent.