How to recover your home loan interest with a SIP
In this article
- Dealing with Home Loan Investments
- What Are SIPs?
- How SIP Relieve Burden
- Terms and Conditions
- How to Choose SIP
‘Little disciplines compounded over time make a huge difference.
While old habits die hard, new habits grow gradually. Although it is advisable not to spend money before even having it, big investments demand bigger risks.
Colleagues Rohit and Ishan both earn an excess of ₹80,000/month. While Ishan resides at his ancestral house, Rohit plans to purchase an apartment in Kolkata. However, he is baffled at the possibility of paying more in home loan interest than the total price of the apartment.
The increasing cost of real estate, particularly in urban areas sometimes makes the home loan interest more than that of the actual loan in the long run.
‘What is to be done, then?’ you ask.
SIP in the index or mutual fund is the answer, some experts suggest.
Want to know how? Here’s more.
Dealing with Huge Investments Like Home Loans
Home loans are lump-sum chunks of credits that require you to repay over two or more decades. Thus, a loan of ₹30 lakhs at a 9% interest rate for 25 years will attract a total interest payment of ₹45lakhs which is eventually more than the principal amount and the total cost of the house will be around ₹76 lakhs in 25 years.
Monthly payments in the form of Equated Monthly Instalments or EMIsallow repayment of the principal amount plus interests. Prepaying a part of the loan may ease the burden slightly.
Or, Rohit may grab the EMI waiver opportunityor trand ansfer his loan to a different lender. But, of course, paying higher EMI can also lessen his burden.
But has Rohit heard of loan recovery through SIPs in any mutual funds yet?
What Are SIPs?
Investing requires discipline and an understanding of market intricacies. However, elements such as volatility and market timing can affect your profit-making. Make the best of both worlds by investing through Systematic Investment Plans in a mutual fund of your choice.
Essentially, SIPs are common investment pathways that allow depositing a fixed amount for a fixed tenure. Like recurring deposits, SIPs also accept regular monthly investments with provisions for issuing standing instructions for withdrawal.
Investing in mutual funds via SIPs allows the elimination of the risks involved in lump sum investments. It activates a sense of financial discipline irrespective of the market fluctuations.
Since you deal with a longer tenure, you smoothen out riskier parameters like volatility. SIPs begin with a minimum investment of ₹500.
How Can SIPs Relieve The Burden of Home Loans?
Rohit is perplexed at the idea of having 70-80% of his home loan amount easily recovered with SIP investment in mutual funds. But, unlike investing in riskier elements like shares and equities, investing in a basket of equities evens out the risks.
Thus, for his home loan of ₹30 lakhs at 9% for 25 years, Rohit will pay ₹75,52,767. The interest payments of ₹45,52,767, which is even higher than his principal amount, may shatter his dream of owning his dream house.
However, investment in mutual or index funds through SIPs at the beginning of home loan repayment tenure can help him recover almost the entire home loan amount. Rohit invests an amount via SIP that is equal to a certain portion of the loan EMI on Ishan’s advice. Assuming that he invests ₹3000/month in equity funds with a SIP also with a tenure of 25 years, he can obtain a total value of up to ₹98,52,221 at a 15% return.
With the possibility of recovering almost his entire loan amount, Rohit thinks no further while applying for his home loan. SIPs can work wonders for all your finances. With high transparency and regulations, SIPs are safe and secure.
Terms and Conditions
Seeking professional financial advice is highly essential. In addition, SIPs mitigate the risks of market crashes because they usually have a higher tenure.
Standard procedures for applying to a SIP involve producing a PAN card and other personal details. Institutions providing SIPs advise investors to complete their KYC forms to help them initiate the process. In addition, potential investors should provide their bank details and the scheme they are interested in.
How to Choose a SIP That Matters?
Firstly, one should begin with a specific financial goal, e.g. to gather enough funds to easily recover a loan. Since Rohit is willing to ease out his home loan over 25 years, he needs to select a SIP that provisions for such long tenures.
Secondly, since SIPs earn more in longer tenures, it is beneficial for investors to choose fund plans that allow long-term investment options. For example, since Rohit aims to pay his loan off in 25 years, he might choose to make investments for the same tenure.
Thirdly, mutual funds are always subject to different market risks, and hence one should choose their funds wisely. A risk-averse individual should begin with funds that carry lesser risks. Since monthly instalments earn better during market lows, investments should be made accordingly.
Fourthly, one should check the reputation of fund houses before making such an investment. Rohit should therefore choose a fund plan that can handle market fluctuations and let him benefit from such volatility.
Wrap Up
Unlike other investment types, SIP investments are customisable. Salaried individuals prefer SIPs over lump sum investments because it provides the freedom to distribute their funds evenly.
Rohit’s contribution to equity funds via SIP guarantees his home loan recovery and even earning more from it. Experience financial freedom with Systematic Investment Plans and realise your dream!
