Buy­ing a home on loan? Don’t stop in­vest­ing

Hindustan Times (Chandigarh) - Estates - - HT ESTATES - Ashok Ku­mar ht­spe­cial­pro­jects@htlive.com The au­thor is CEO and co­founder of Scrip­box, an on­line mu­tual fund in­vest­ment plat­form

Buy­ing a home is one of the big­gest fi­nan­cial de­ci­sions in a per­son’s life.

This de­ci­sion makes a per­son take a closer look at his or her fi­nances, re­duce monthly ex­pen­di­ture, do with­out the next va­ca­tion or forego the de­sire to buy a smart phone. All of this is jus­ti­fied too. After all, nearly 40% of a per­son’s take home salary will be ear­marked for a very long fi­nan­cial obli­ga­tion!

Most peo­ple will take a loan for pur­chas­ing their dream home and then pay off the loan in EMIs. Let us un­der­stand this scheme of things a lit­tle bet­ter with the help of an il­lus­tra­tion.

Let us take the value of the home loan to be Rs 20 lakh and the loan pe­riod to be 20 years. If the rate of in­ter­est be taken as 8.65%, a per­son will have to pay a monthly EMI of Rs 17,547. This amounts to Rs 42.11 lakh paid through EMIs over the loan pe­riod.

It be­comes clear that in ab­so­lute terms, the bor­rower even­tu­ally pays dou­ble the amount bor­rowed by the time he or she re­pays the loan.

An im­por­tant ques­tion to ask is, if a per­son can af­ford Rs 17,547 per month, can he or she also ear­mark an­other 10% per month?

It is only fair to pon­der, what could 10% of the monthly EMI pos­si­bly buy a per­son?

In­vest­ing this sum in an equity mu­tual fund for the same pe­riod as the du­ra­tion of the loan can de­liver sur­pris­ing re­turns.

So, if we were to do the math, here is how it would go. 10% of the EMI is Rs 1,750. The SIP pe­riod or the sys­tem­atic in­vest­ment plan pe­riod is 20 years. We are con­sid­er­ing this as the du­ra­tion be­cause it is also the ten­ure of the loan. With a re­turn rate of 14%, the fi­nal amount ac­cu­mu­lated through in­vest­ment would be Rs 23 lakh!

It may amaze you to find that the amount gen­er­ated through reg­u­lar and sys­tem­atic in­vest­ment is greater than the home loan amount you ac­tu­ally bor­rowed! This is pos­si­ble due to the power of com­pound­ing and the long du­ra­tion of in­vest­ment. If we look at his­tor­i­cal data when peo­ple in­vest over a long pe­riod of time, the Sen­sex has ac­tu­ally de­liv­ered over 14% re­turns on an av­er­age per year.

As un­be­liev­able as it may sound, things can get even bet­ter. Apart from in­vest­ing a fixed sum as il­lus­trated above, if the in­vestor in­creases his or her SIP con­tri­bu­tion by 10% ev­ery year dur­ing the ten­ure of the loan, the fi­nal amount could be Rs 43.4 lakh. This is greater than the sum to­tal of all EMIs paid to­wards the home loan!

The bot­tom line is, it is highly ad­vis­able to be­gin or con­tinue in­vest­ing when you take a home loan.

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