In today’s world, home loans have become a crucial financial tool for many aspiring homeowners. Home loans have opened the doors to homeownership for those who couldn’t amass large sums of money to buy a house outright. However, while they offer a path to owning a home, repaying a home loan over a long tenure, often ranging from 15 to 30 years, can feel burdensome. Borrowers pay two to three times the original loan amount as interest over the loan term. But there’s a way to ease this burden and recover the full cost of your home loan, including the interest.
Understanding the Interest Component
To grasp how much interest you pay, let’s consider an example:
- You take a home loan of ₹30 lakhs from SBI for 25 years at an interest rate of 9.55%.
- According to the SBI home loan calculator, you would repay ₹78,94,574 in 25 years instead of the initial ₹30 lakhs.
- If you opt for a 20-year tenure, the total repayment reduces to ₹67,34,871; for a 15-year tenure, it further decreases to ₹56,55,117.
The critical insight here is that the longer your loan tenure, the more interest you pay. This underscores the importance of choosing a shorter tenure to minimize interest payments, although it increases your monthly EMI.
The Impact of Loan Tenure on Interest
A longer tenure reduces your monthly EMI, making it seem more affordable, but it significantly increases the total interest paid. Conversely, a shorter tenure results in higher monthly EMIs but substantially reduces the total interest, saving you money in the long run.
Recovering the Cost of Your Home Loan Through SIP
To recover the total cost of your home loan, including the interest, consider starting a Systematic Investment Plan (SIP) in mutual funds. Here’s how it works:
- Start Early: Begin your SIP as soon as your home loan starts. The key is to run the SIP for the same duration as your loan tenure.
- Invest a Fraction of Your EMI: Allocate 20-25% of your monthly EMI amount to the SIP. For instance, if your EMI is ₹28,062, invest around ₹7,015 monthly in a SIP.
- Leverage Compound Returns: With an average annual return of 12% from your SIP over 20 years, compounded returns can help you recover the total repayment amount.
A Practical Example
Let’s break it down with numbers:
- Loan Amount: ₹30 lakhs
- Loan Tenure: 20 years
- EMI: ₹28,062
- Total Repayment (Principal + Interest): ₹67,34,871
- Interest Component: ₹37,34,871
By starting a SIP of ₹7,015 (25% of your EMI) for 20 years and assuming a 12% annual return, you could accumulate approximately ₹70,09,023, more than the total amount you would repay on the loan. A higher return rate would yield even greater gains.
Points to Consider
While investing in SIPs can be highly rewarding, it’s crucial to understand that mutual funds are subject to market risks, and returns are not guaranteed. However, with an average long-term return of around 12%, mutual funds can offer a robust strategy to counterbalance your loan costs.
Conclusion
Home loans can be a stepping stone to realizing your dream of homeownership, but the financial commitment should be managed wisely. You can effectively mitigate the financial burden by understanding the impact of interest over the loan tenure and leveraging investment strategies like SIPs. Careful planning and strategic investments can help you repay your loan comfortably and recover the entire cost, including interest, making your home your own.