Tuesday, 13 September 2016

Should You Prepay Home Loan - EMI vs SIP

If i had to ask you, What are the three basic necessities of human, I am sure your answer would be Food, Clothing and Shelter (Roti, Kapda & Makaan) but shelter is something which becomes the most prized possession of our life.



Typically in India what i have seen is,as soon as you start earning there is so much of pressure in buying a home. 

Once you do this then EMI is something which becomes a part of your cash flow statement.

After Paying your EMI's for couple of years few of things can 
happen which are mentioned below 
1-> Your Salary Increases 
2-> You get a lump sum from somewhere 
3-> you get married and your spouse is earning 

The most natural thoughts the come to your mind is "Should i make some pre-payment towards my home loan so that my tenure comes down and i am able to repay my home loan as soon as possible"

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But Hold on what if i say you can invest in better returns rather then paying off your home loan and this is what exactly we are going to see in this article 

Let me give you an example 
Mr Ravi took a home loan of Rs 50 Lakhs @ 10% for 20 years for an EMI of Rs 48,251
After paying 1 year EMI , Mr Ravi gets married and his wife is also earning Rs 20000 a month, so now they have extra disposable income Rs 20000.
The most natural thought that comes to Ravi's mind is "Should i make some prepayment towards my home loan now that i have Rs 20000 extra or should i invest them somewhere else"

Below are the 2 Scenarios

In Scenario 1 : Ravi decided to invest his extra disposable income Rs 20000/- in mutual funds through SIP for 19 years, I have taken 19 years because 1 year EMI has already been paid 

In Scenario 2 : Ravi could have paid his home loan in 10.25 years while doing a pre-payment of Rs 20000/- each month start from 13th month i.e after 1 year and whatever amount they were paying towards the home loan i.e 48251 + 20000 = Rs 68251 are now available into mutual funds through SIP for 9.75 Years 
9.75 Years because Ravi took a home loan for 20 years and paid off in 10.25 years 
In the below Image ,



1st Column shows the rate of returns expected on investments 
2nd Column Shows the return of SIP of Rs 20000/- if invested for 19 years 
3rd Column shows the return of SIP of Rs 68251 invested for 9.75 years 

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Investment @ 10% return in MF would not make a larger difference but as the rate of returns increase the difference between these 2 sip(s) also increase and we could see that Rs 20000 SIP is doing far more better 
What i want to suggest here is whenever you have some extra income don't just rush into pre-paying your home loan just because you want to finish it off.

Utilize this opportunity whenever you have rise in your income or income from some or the other source, Invest extra income into some avenue which would give you better returns than just paying off your home loan and at the same it would help you build a nice corpus for your future.

Home Loan is the cheapest form of loan available plus it comes with tax benefit.

SIP is the best way to achieve better returns, history suggest that good mutual funds have given returns about 12%-15% on a CAGR basis on past 10-15 years 

What would you do if you come across such a situation or you already in one , will your prepay your home loan or would you invest your surplus into MF through SIP
Hope you got the answer now...

Do let me know your thoughts in comment section....

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Who doesn't like a financial healthy life,In case if you want one, contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you


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