What if your home loan tenure is reduced without increasing EMI, even if the interest rate remains the same? Sounds interesting? Read on.
Loan Amount: Rs. 48 lakhs
Tenure of Home Loan: 20 years
Rate of Interest: 10.50% p.a.
EMI: Rs. 47,922
Loan Amount: Rs. 48 lakhs
Tenure of Home Loan: 25 years
Rate of Interest: 10.50% p.a.
EMI: Rs. 45,302
Savings: Rs. 47,922 – Rs. 45,302 = Rs. 2,620
This combination (Scenario II) and an assumed return of 15% CAGR from SIP can help you repay the loan in just 18 years and 2 months.
EMI: Rs. 47,922
EMI: Rs. 45,302 + SIP Rs. 2,600 = Total Rs. 47,902
In both cases, the monthly outflow is the same; the difference lies in methodology. In the first case, you are only paying EMI, whereas in the second case, by increasing the tenure, you save on EMI and invest the difference in an SIP.
After 18 years and 2 months, the value of the SIP of Rs. 2,600 per month (assuming a 15% CAGR) would be approximately Rs. 26.29 lakh, which can be used to fully repay the outstanding home loan principal.
In other words, the outstanding loan amount would match the fund value of the SIP after 18 years and 2 months.
By following this approach, you would pay 22 EMIs less compared to Case 1, making an absolute saving of Rs. 10.54 lakh in EMI payments.
Effective Interest Rate: Though the bank charges 10.5% interest, your effective rate would reduce to 10.03%.
If you are planning to take a home loan for a shorter tenure, you can use this strategy to save on EMIs while benefiting from compounding returns.
Note: The return showcased is an assumed return and should not be treated as an assurance or guarantee. Consult a financial advisor before making investment decisions.