Ever feel the pressure to ditch the rent and buy a house?
“It’s time to settle down, buy a house! How long will you throw away money on rent?”
But after you buy that dream home, a new challenge appears: repaying the home loan as soon as possible. Stressed about what Home Loan repayment Strategy to use?
Let’s explore two scenarios with Arjun and Priya to see which strategy works better for managing and repaying a home loan.
Arjun and Priya both have the same goal:
To own a home and pay off their home loan efficiently. However, they choose different paths to repayment of home loan. Arjun opts for a conventional approach with a standard 20-year loan, while Priya decides to take a more innovative route by extending her loan tenure to 30 years and investing the savings in a Systematic Investment Plan (SIP).
By comparing their strategies, we can determine which one offers better financial benefits in the long run.
Arjun’s Plan: The Typical 20-Year Loan
Arjun gets a home loan of ₹90 lakh for 20 years. Here’s a quick look at his plan:
- EMI: ₹78,104 per month
- Total Interest Paid: Over 20 years, a hefty ₹98 lakh
- Overall Repayment Amount: ₹1.88 crore (principal + interest) over 20 years
Arjun’s approach is straightforward. He aims to repay the loan within the standard 20-year period, making consistent monthly EMI payments.
While this method ensures that his home is paid off within the designated timeframe, it also means a significant portion of his monthly income goes toward repaying the loan, leaving less room for other investments or savings.
Priya’s Plan: Extended 30-Year Loan with SIP Investment
Priya thinks outside the box:
- Extend the Loan Term: She stretches the loan term to 30 years
- Lower EMI: This reduces her EMI to ₹68,789, saving ₹9,315 every month
- Invest the Savings: Priya puts this monthly saving into a Mutual Fund SIP with an average annual return of 12% (historical data shows equity SIPs can give such returns)
Particulars | Arjun (Standard 20-Year Loan) | Priya (Extended 30-Year Loan with SIP) |
---|---|---|
Loan Amount | ₹90 lakh | ₹90 lakh |
Loan Tenure | 20 years | 30 years |
EMI Amount per month | ₹78,104 | ₹68,789 |
SIP Investment | Not Applicable | ₹9,315 per month (saved from lower EMI) |
Comparing the Standard Loan with Extended Loan and SIP: Impact After 18 and 20 Years
After 18 Years
A big plus of Priya’s strategy is the potential for early repayment of home loan. Here’s the comparison:
- Remaining Loan Amount: ₹61,34,000 after 18 years
- SIP Corpus After 18 Years: ₹63,12,000
By the end of 18 years, Priya can use her SIP corpus to clear the remaining loan and still have ₹1,78,000 left. This lets her finish the loan two years early, saving even more on interest.
After 20 Years
Let’s look at the situation after 20 years:
- Arjun:
- Loan Status: Home loan fully repaid
- Total Interest Paid: ₹98 lakh
- Total repayment Amount: ₹1.88 crore
- Priya:
- Remaining Loan Amount: ₹55,21,000 after 20 years
- SIP Corpus After 20 Years: Approximately ₹81,79,000
Priya can now use her SIP corpus to clear the remaining loan. Even after repaying ₹55,21,000, she has around ₹26 lakh left!
Feature | Arjun (Standard 20-Year Loan) | Priya (Extended 30-Year Loan with SIP) |
---|---|---|
Loan Closure Status | Loan Fully Paid | Loan Fully Paid |
Total Repayment Amount | ₹1.88 crore | ₹1.69 crore |
Remaining Loan Amount | ₹0 | ₹0 |
Total SIP Corpus | Not Applicable | ₹81,79,000 |
Net Savings | Not Applicable | ₹26,00,000 |
Dream Home and Wealth Building: How Priya Saved ₹26 Lakhs!
Strategy Comparison
Both plans result in the loan being repaid in 20 years. However, Priya’s method lets her:
- Keep an additional ₹26 lakh after using her SIP corpus
- Possibly repay the loan even earlier (in 18 years) while still having extra funds
Why It Works: Building Wealth While Clearing the Home Loan
Priya’s approach offers a smart way to achieve homeownership and financial goals at the same time. Here’s how:
- Lower EMIs, Higher Investments: Extending the loan period lowers monthly EMIs. Investing the savings in an SIP allows for wealth growth over time.
- Faster Mortgage Freedom: This method can potentially let you repay your mortgage in as little as 18 years, freeing you from monthly payments and offering financial flexibility sooner.
- Wealth Accumulation: By combining a longer loan term with SIP investments, you can become mortgage-free in 20 years while also building substantial savings (like ₹26 lakh).
Key Considerations
- Market Variability: SIP returns are not guaranteed. Choose a plan that matches your risk tolerance.
- Discipline Required: Consistent SIP contributions are essential for the strategy to work.
Conclusion
In the journey of homeownership, choosing the right loan repayment strategy can make a significant difference in your financial well-being.
Extending the loan tenure and investing the EMI savings can provide flexibility, potential early loan repayment, and additional financial growth. This approach not only helps in managing monthly cash flows but also in building a sizable corpus over time.
Ultimately, the choice of repayment strategy depends on your financial goals, risk tolerance, and discipline in adhering to the plan.
By considering these factors, you can make an informed decision that aligns with your long-term financial aspirations. Remember, there’s always a smarter way to achieve homeownership and build wealth simultaneously. Reach out to our team of experts to get more clarity on your home ownership dreams!
Frequently Asked Questions
The repayment structure of a home loan typically involves monthly installments called Equated Monthly Installments (EMIs). Each EMI consists of a principal and an interest component. Initially, a larger portion of the EMI is allocated towards interest repayment, and as the loan tenure progresses, a greater portion goes towards repaying the principal amount. This structure is designed to ensure that the loan is paid off completely over the agreed tenure.
The repayment period of a home loan varies depending on the lender and the borrower’s preference, but it typically ranges from 5 to 30 years. Borrowers can choose a tenure based on their financial capability and long-term financial goals. Shorter tenures have higher EMIs but lower overall interest payments, while longer tenures have lower EMIs but higher total interest costs.
Yes, a home loan can be repaid early through a process called prepayment or foreclosure. Borrowers can make extra payments towards the principal amount, thereby reducing the outstanding loan balance and the total interest payable. Some lenders may charge a prepayment penalty, so it’s important to review the loan agreement for any applicable charges.