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Make a Home with Reduced EMI and SIP

Most people have a love-hate relationship with loans. It is no surprise that people are always in a hurry to get rid of the liability of loans as it makes them nervous even if it helps them own a house.

Those who vouch for housing loans may cite tax benefits as an advantage. However, high interest rates are indeed a worry for many.

Consider having a housing loan for a span of 25 years. By the end of loan period, you will have paid double the loan amount as interest while the appreciation in the value of the house or apartment remains less.

However, for many, owning a house is an emotional decision where numbers matter less. It is in this context that we will cite a few ideas on reducing the burden of loans and creating wealth using EMI and SIP.

Reduce the EMI

Let us take the example of X with a housing loan of 25 lakhs. At an interest rate of 9.25%, X will have to pay 23,000 for 20 years. However, with a reduced interest rate of 7.25% for 25 years, the EMI will also be reduced to 18,000. In case X does not want to increase the loan period, the EMI will be 19,500 for 20 years.

X Loan amount Interest rate EMI Loan period
Before reduction 25 lakhs 9.25% 23,000 20 years
After reduction 25 lakhs 7.25% 18,000 25 years

Or

X Loan amount Interest rate EMI Loan period
After reduction 25 lakhs 7.25% 19,500 20 years

Here, let us analyse the second row. Once the EMI amount is reduced, there will be a balance of 4000Rs. X can invest the amount in an appropriate equity fund for 25 years, i.e., till the end of loan period. So, in these 25 years, X will have invested 12 lakhs but will receive 75 lakhs in hand with an expected return of 10% to 12% in equity. Thus, reducing the EMI leads to wealth creation.

SIP Returns

Monthly Savings Period Total investment Returns
4000 25 years 12 lakhs 75 lakhs

In 25 years, X will have paid 66 lakhs into buying the house including the 54 lakhs to the bank and the 12 lakhs which is invested. After 25 years, what X receives in return is a house with an additional amount of 9 lakhs. If 25 years seem too long, X can check the returns of the SIP after 15 years in which it will have grown to 20 lakhs. This can be used to close the loan amount of 15 lakhs.

 Total returns after loan period

Loan period EMI amount  SIP EMI savings SIP EMI returns
25 years 54 lakhs 12 lakhs 75 lakhs

Try SIP + EMI savings and release yourself from the burden of long-term loans.

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