How to Make Your Home Loan Interest Free?

Written on Monday, September 4, 2017
By Mitali Sharma

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From the very first day of earning, most of us nurtures the goal of having our own home and we do make savings to achieve this goal as early as we can. But in India, it is a reality that housing is yet not very affordable. The ratio between average earning capacity and the cost of an average plot is not much in sync. As a result, buying a home always appear to be an expensive and distant dream for most of us. However, in order to become free from house rents and also for emotional reasons, we do try to make this dream come true as early as possible by taking the support of 'Home Loan.' 

 

The Problem: Home Loan Interest Takes Away Hefty Money 

 

For an average home buyer, the challenge is to accumulate the initial down payment, and after that, they just need to take care of monthly EMIs to repay the loan for which they get long tenure like 20-30 years. The loan facility indeed makes housing a convenient affair as it allows one to purchase his/her own home probably at a much earlier phase of. Otherwise, one has to wait for a very long period in order to accumulate the amount that will suffice the total cost of a property. 

 

It won't be a new revelation that the interest paid on the loan amount is much higher than the principal amount. So as result, the home buyer ends up paying much more than the actual amount of his property. Is there a way to compensate that loss? Yes, there is a way out and exactly that's what this blog will discuss. 

 

An Illustration: 

 
For example, if you have taken a home loan of Rs. 15 lakh for 20 years @ 8.35%, then your monthly EMI will be around Rs. 12,875. 
 
a. So if you keep paying this EMI for 20 years, then you will end up paying Rs.30, 90, 000 to the bank.
b.This means you have ended up paying extra Rs. 15, 90, 000 in the name of interest in your effort to save house rent payments.
 
However, there is no way out to get rid of interest because that's how the system works, and you can't keep delaying your 'Home Sweet Home' dream just by fearing the interest. But if you can find a way out to compensate the money that you have spent in the name of interest, won't that help in keeping your financial status better and stable?
 
Solution: Systematic Investment Plan (SIP) Can Get Your Money Back 
 
Systematic Investment Plan (SIP) is the way out to refill your account with that money which you had to give out in order to pay the interest. Check out how SIP can help. 
 
SIP Time-horizon 
 

a. The day you start paying your EMI, also start a monthly SIP till the tenure of your home loan. 

b. Means if you are going to pay your EMI for 20 years, then your SIP should also last for 20 years.

 
SIP Amount
 
a. Your SIP amount should be equal to 0.1% of your home loan amount.
b. If your home loan principal amount is Rs. 15 Lakh then, the monthly SIP amount should be Rs. 1500.
 
SIP Returns 
 
a. When you continue investing that Rs. 1500 (monthly) for 20 years, your investment amount will be Rs. 3,60,000. 
b. After 20 years, if you manage to get 15% rate of return (returns will be market-linked), then the value of your SIP will grow up to Rs. 22, 73, 932.
c. From this increased value, even if you minus your invested amount, which is Rs. 3, 60,000, then also you will have Rs. 19, 13, 932. with you
 
You can now do the comparison: 
 
a. Interest paid on your home loan: Rs. 15, 90, 000
b. Returns earned from your SIP:    Rs. 19, 13, 932
 
Doesn't it make your home interest free? Technically Yes! 
 
Conclusion
 
Paying the home loan interest amount is mandatory. You have no choice but to do it. However, whether to start a SIP or not is definitely your choice. What will you choose? Rather than doing nothing, isn't it wise to start a small SIP?
 
Disclaimer: SIP is not a product. It's a route to invest in the mutul fund. Mutual fund investments are subject to market risks. All the figures used in the blog are for illustration purpose only, and the rate of returns is the assumed rate of returns.

 

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