Let’s talk about home loan having interest of 9% to 10% per annum.
Imagine you have a home loan of the amount of ₹60 lakh, you pay roughly ₹60,000 as EMI (equated monthly installment) per month. So, in a span of 20 year period, you pay approximately ₹84 lakh interest.
So, you took ₹60 lakh housing loan but through EMI you are paying ₹ 60,000 per month. Thus, over a 20-year period, you pay ₹60 lakh plus ₹84 lakh, which is ₹1.44 crores. It means you will pay almost double to the housing finance company.
So, which strategy must be followed for early pre-paying the home loan?
Now when You have to pay ₹ 60,000 EMI, Start ₹ 20,000 SIP. Let’s take NSE Nifty 50 Index as an investment option here. So,you have started ₹ 20,000 SIP in Nifty. You are paying ₹ 60,000 EMI and you also start ₹20,000 SIP per month. Don’t withdraw this amount for the first 3 years.
After 3 years, check the progress of your SIP. You set 15% target rate on SIP. After three years, if the IRR of SIP goes beyond 15%, it means markets are doing very well and it is rising.
Now, you withdraw your money equivalent to 2 years contribution. Keep the amount contributed in last 12 months because there could be exit load charges and higher tax payments.
It is not necessary that you hit 15% target in 36 months. Sometimes, it takes 48 to 60 months. So, Whenever you hit the 15% target, you take out that money except the last 12 installments of SIP and to the extent of withdrawal, repay your housing loan.
It helps you to sell in the rising market. While selling in the rising market, you are also paying your liability. Even If the 15% return happens in the 43rd month then remove the money invested of the first 31 months & continue with your SIP. You are not stopping your SIP.
On an average, you will be able to repay your 20-year housing loan in 10-11 years.
Once you repay the housing loan of 20 years in 15 years, after that there is no EMI. Now, ₹60,000 EMI can be converted into SIP and your previous ₹20,000 SIP continues. So, you have total SIP of ₹80,000. There is huge advantage of this structure because you have trusted SIP to prepay the housing loan. As the housing loan is repaid, let the EMI get converted into SIP.
Normal investor who have paid the housing loan in other ways, don’t have that kind of trust in SIP. After repayment of loan, your SIP is not ₹ 20,000 but ₹ 80,000. Thus, over a period of time, it will create more wealth for you.
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