Buying a home on loan? Don’t stop investing
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.