Almost all Indians are conditioned to own at least 1 house of their own. It forms one of the basic human needs. Since real estate in India is one of the most expensive in the world as compared to the earning of the populace, we invariably opt for a home loan. And then tie ourselves down to EMIs for the next twenty years. The average age for borrowing such a loan is around 30, when one has a family and in no time expenses start mounting. The EMI leaves little scope for any savings. At least we mentally shut out all other saving options as well.
Home loans cost you an insane amount of money over their lifetime
Let us understand it with an example
Home Loan Amount – Rs. 25 Lakhs for 20 years
- Interest rate – 9% p.a.
- Monthly EMI – 22,493/-
- Interest to be paid – Rs. 28,98,356/-
Take a moment to think about it – you pay more than what you borrowed as interest plus the actual amount.
Solution – Earn the interest amount you will pay by investing in mutual funds
Let us give you a small illustration for better understanding:
Start a monthly SIP of 0.15% of the principal amount in a diversified equity mutual fund.
Hence, start a monthly SIP of – Rs. 3,750/- (0.15% of Rs. 25 lakhs)
- Monthly SIP Amount – Rs. 3,750/-
- Total Amount Invested over 20 years – Rs. 9,00,000/-
- Final expected portfolio value (assuming a modest return of 12% CAGR) – Rs. 37,47,000/-
- Hence, wealth gained – Rs. 28,47,000/-
The capital appreciation of Rs.28,47,000/- on your SIP investment offsets the interest on the home loan.
Thus, some discipline in setting aside a small portion of your income along with your EMI payments can go a long way in offsetting the interest payment made over the years. If you plan to borrow for buying a house or if you already have a home loan, put some maths and discipline into the picture, start a SIP and avoid reeling under the burden of home loan interest over the long term.