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Planning To Buy Home

What if your Home loan tenure is reduced without increasing EMI, even if the interest rate remains the same? Sounds interesting? Read it.

Scenario I

Loan Amount - Rs. 48 lakhs

Tenure of Home Loan - 20 years

Rate of Interest - 10.50% pa

EMI - Rs. 47922.00

Scenario II

Loan Amount - Rs. 48 lakhs

Tenure of Home Loan - 25 years

Rate of Interest - 10.50% pa

EMI - Rs. 45302.00

Savings - Rs. 47922 – Rs. 45302 = Rs. 2620

This combination (Scenario II) and assumed return of 15% CAGR from SIP, one can repay the loan in just 18 years and 2 months.

Sounds interesting?

Let me explain,

Case 1: 20 years loan – Outflow (EMI – 47922)

Case 2: 25 years loan + SIP of saving into the EMI (EMI 45302 + SIP 2600 = Total 47902)

In both the above cases monthly outflow is same, only difference is into the methodology. In first case one is only paying EMI in second case by increasing tenure one is saving into the EMI and doing the SIP of that saving, making monthly outflow same as that in case 1.

After 18 years and 2 month, the value of SIP of Rs 2600/- per month assuming the 15% CAGR* would be approximately Rs 26.29 Lacs, which one can use to fully repay the Home Loan outstanding. In other words, the outstanding loan principle amount would equal to the Fund Value of SIP after 18 years and 2 months.

In the whole process one would pay 22 EMIs less compared to Case one, making an absolute saving into the EMI worth Rs 10.54 Lacs. Though Bank charged me 10.5% interest but for me the effective interest worked out to be only 10.03%.

If you are planning to buy the Home loan and if you have decided to take the loan for shorter period then you can use the above idea to save some EMIs.

*The return showcased is the assumed return and is not to be treated as any assurance or guarantee.