Suppose you take a Rs 50 lakh home loan at 8.5% for 20 years. Your EMI will be Rs 43,391 per month. The total interest you pay to the bank will be Rs 54-55 lakh.
So in total, and including principal repayment of Rs 50 lakh as well, you pay the bank Rs 1.05 Cr in 20 years
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Now let’s see what is this so-called 1% SIP trick for Home Loans
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You start a SIP for the same tenure as your home loan (20 years). The home loan is Rs 50 lakh.
So SIP of 1% of the home loan amount, comes to Rs 50,000 (i.e. 1% of Rs 50 lakh). This is the annual SIP amount.
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Converting this annual investment of Rs 50,000 to monthly figures, we have Rs 4167 or Rs 4200 per month – that becomes your 1% SIP investment.
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Your total investment over 20 years would be 20 x 12 x 4200, which is Rs 10.1 lakh.
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Assuming your investments generate returns ranging from 9-12%, here is how much you will have in 20 years:
- At 9% returns, you have Rs 28-29 lakh
- At 10% returns, you have Rs 31-32 lakh
- At 11% returns, you have Rs 35-36 lakh
- At 12% returns, you have Rs 40-41 lakh
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Depending on returns (9-12%), you will have between Rs 29 lakh to Rs 41 lakh after 20 years.
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Even if you deduct your SIP money invested which was Rs 10.1 lakh from the total amount, even then you will get Rs 18-30+ lakh – which, in a way, takes care of a decent portion of your overall home loan interest of Rs 54 lakh, if not full amount.
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I have heard people call this approach as SIP based Interest-free home loan, and at times interest-free home loan mutual fund trick, and what not. I don’t want to call it that.
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But nevertheless, it’s a useful idea to invest some additional amount so that if need be, you can one day prepay your home loan with the accumulated amount even earlier.
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I have written an article on this topic as well. Please do check –
Doing SIP of 1% of the Home loan – SIP Trick?
https://t.co/wqBeUZHQPG (12/n)
I know you might be thinking that what if instead of monthly SIP, you started doing a monthly prepayment of Rs 4200 per month towards the home loan itself.
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In that case, your loan tenure will come down to 17 years (from 20), and your total interest outgo will come down to Rs 42 lakh (from Rs 54 lakh).
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If home loan prepayment interests you, then do check the 3 popular threads I wrote 👇👇
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How to quickly prepay Rs 50 lakh home loan in a few years 👇👇
https://t.co/XNiJz2sEKe (16/n)
What happens when you pay just ONE extra EMI every year towards your home loan -
https://t.co/EFnOtJEz0a (17/n)
When is the best time to prepay your home loans 👇👇
https://t.co/e187EDmHbG (18/n)
So eventually, it is up to you. Some want to get rid of their home loans quickly (& as fast as possible). Others want to just keep paying the basic EMI & let the loan run its course. They instead invest extra amounts elsewhere (mostly equity) to get higher returns.
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Depending on what your risk appetite and preferences are, you should pick an approach accordingly.
But remember - Your home loan is not your only priority. You need to invest for other financial goals as well. So don’t get too obsessed with the home loan prepayment.
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That was the thread about 1% SIP of Home Loans. If you found this thread 🧵useful, then do share it with others.
You can also retweet the link to the first tweet of this thread to spread the word. Link below 👇👇
https://t.co/JFI3CkC1lj