Buying a house is a massive financial decision. It involves huge costs which can be met by availing a home loan. Banks sanction only 75-90% of the property value, and the rest is out of pocket. You’ll have to pay EMIs throughout the loan tenure, which can be really long. Servicing a home loan requires long-term financial commitment.
Though servicing a home loan looks difficult, it can be made simple with sound financial planning. Consider investing in Mutual Funds. SIPs (Systematic Investment Plan) help in financing your dream home.
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SIPs can help at each stage of servicing a home loan, be it accumulating the down payment or closing the loan faster through prepayment.
SIP is a method of investing in mutual funds through a systematic, disciplined and regular manner. SIPs make investments in mutual funds easy. It is similar to Recurring Deposits (RD’s). You can deploy a pre-determined amount of money into mutual funds at regular intervals (weekly, monthly, quarterly, and so on.). You’ll be allotted mutual fund units based on the NAV (Net Asset Value) of the funds.
Banks require you to pay 10-25% of the home loan as down-payment. Start investing in SIPs long before you approach banks to apply for a home loan. Investing in mutual fund SIPs for medium (3-5 years) to long-term (5-7 years), enjoys the power of compounding. This can build the desired down-payment corpus for the home loan.
The annual returns on SIPs vary across mutual funds. On an average, you can expect:
1. 12-18% returns on large-cap equity mutual funds
2. 14-17% returns on mid-cap equity funds and
3. 7-9% returns on long-term debt mutual funds
Let us say you want to buy a house worth Rs 60 Lakhs after 5 years. Assume you would have to make a down-payment of 25% (Rs 15 Lakhs) of the value. If you invest in large-cap equity funds for 5 years, with returns @ 12.5% per year you’ll earn:
t = 12 (frequency of compounding)
Therefore, accumulating a corpus of Rs 15 Lakhs in 5 years would require investing in SIP of Rs 18,000 per month at 12.5% p.a.
Once, you accumulate the down-payment, select banks offering the home loan which best suits you. You can do it through online aggregators who help compare home loan rates vis-à-vis banks.
SEE ALSO: How To Pay Off Home Loan Faster?
Banks sanction home loans of 5-10 times annual income. The long tenure of home loan (20-30 years) occupies a major portion of your working life.
When availing a home loan, it is important to choose tenure wisely. The general notion is: longer the tenure, lower the EMIs. This enables you to make repayments comfortably, but it also increases the cost of the loan. This is because you end up paying interest for a longer duration.
Suppose you wish to shorten the tenure from 30 years to 20 years, the only way to do this is prepay the home loan. Prepayment means closing your home loan before the loan tenure ends. You can prepay your home loan either partially or fully. You’ll need to plan and start building another corpus for prepayment. This corpus should be specifically assigned to close your home loan faster.
Even if you manage to pay a Lakh or two more each year, you can close the home loan faster. Ideally, you should start prepaying a loan in the late 30s or early 40s. It all depends on how comfortable are you in meeting all other financial obligations. Prepaying home loan shouldn’t disturb other obligations.
To build a prepayment corpus, start investing at least 10% of home loan EMI amounts in mutual funds through SIPs. Over time, it’ll grow to be sufficient to prepay the loan.
In our example:
House/Property value = Rs 60 Lakhs
Down-payment = Rs 15 Lakhs
Loan amount = Rs 45 Lakhs
Loan tenure: 30 years
Interest rate: 9% per year
EMI = Rs 36,208.
Use IndianMoney Home Loan EMI Calculator to calculate EMIs:
1. Start early and invest in mutual fund SIPs to accumulate down-payment corpus and prepayment corpus. Money needs time to grow. Also, your investments will give greater returns because of compounding.
2. Keep reviewing your investments. Track the portfolio’s performance. If the portfolio is underperforming for a period of about 2-3 years, make changes like: Change the fund manager or exit such funds and invest in better options.
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