When you take a home loan, you may want to prepay it quickly. I have heard this many times that doing a SIP of 1% of Home Loan Amount can be a good idea. Some refer to it as SIP based trick for Interest-Free Home Loan. So I wanted to give it a try and do some number crunching.
Suppose you take a home loan of Rs 50 lakh for 25 years tenure.
Considering home loan interest at 8%, if you use a home loan EMI calculator, the total amount payable to the bank is Rs 1.15 Cr at the end of 25 years. This includes principal repayment of Rs 50 lakh and interest payment of Rs 65 lakh. The EMI is Rs 38,591 per month.
Now, suppose you start a SIP for the same tenure as your home loan which is 25 years. Since we are talking about SIP of 1% of home loan amount, it comes out to Rs 50,000 (i.e. 1% of Rs 50 lakh) – which is the annual SIP amount.
So let’s say, you start a SIP of Rs 4167 or Rs 4200 per month.
This is less than 0.1% of your overall home loan amount.
Your total investment over 25 years would be 25 x 12 x 4200, which is Rs 12.6 lakh.
Assuming your SIP generates returns ranging from 8-12%, here is what you end up accumulating over 25 years:
- At 8% SIP returns, you have Rs 39-40 lakh
- At 9% SIP returns, you have Rs 46-47 lakh
- At 10% SIP returns, you have Rs 54-55 lakh
- At 11% SIP returns, you have Rs 64-65 lakh
- At 12% SIP returns, you have Rs 75-76 lakh
So depending on the SIP returns you get after 25 years, you will have anywhere between Rs 39 lakh to Rs 76 lakh. Even if you deduct your SIP money invested which was Rs 12.6 lakh from the total amount, even then you will get Rs 26-63 lakh – which, please note, takes care of a large chunk of your overall home loan interest of Rs 65 lakh that you pay, if not full amount.
So in a way, you end paying a large part of the entire home loan interest amount by just the returns from your mutual fund SIP. Some people like to call it:
- SIP based Interest Free Home Loan
- Interest-Free Home Loan
- Interest Free Home Loan investing in Mutual Fund SIP trick
I don’t want to call it that. But nevertheless, it’s a useful idea to invest some additional amount so that if need be, you can one day prepay your home loan with the accumulated amount.
You can call this monthly SIP amount as going towards the goal of home loan prepayment if you want.
Further Reading – To know what other SIP amounts can help you achieve, do check detailed calculations about Rs 5000 SIP or Rs 10,000 SIP or Rs 15,000 SIP or Rs 20,000 SIP or Rs 25,000 SIP or Rs 50,000 SIP or even Rs 1 lakh monthly SIP.
So if you wanted to know How to make your home loan interest-free – Then the answer is to recover the loan interest amount by investing in mutual fund SIP with 0.1% of your home loan amount.
By starting an extra SIP of a very small amount, you can easily ‘in a way’ recover the entire interest amount or even much more than that.
Further reading – Home Loan EMI Vs Mutual Fund SIP
But remember one important thing. Your home loan is not your only priority. You need to ensure that you start saving for other financial goals in time so that you aren’t late and at the mercy of luck to achieve your goals. So don’t get too obsessed with the repayment of your home loan. It’s important but not too important. There are other goals to take care of as well.
I hope you found this article on using a combination of Home Loan EMI and Mutual Fund SIP useful. Investing in Mutual Funds while paying Home Loan EMIs can have a lot of benefits and help you repay your home loan quickly if not make it interest-free per se. So that was about the trick to use SIP of 1% of Home Loan Amount to make your home loan interest-free (2021).