Buying and owning a home is a dream of many. People often use their savings clubbed with a loan to purchase their home. However, home loans are not always cheaper if someone pays for a tenure of 15 or 20 years, the amount almost gets doubled due to the high-interest payments. Saving money on your home loan interest can significantly impact your financial well-being. Mitigating your home loan interest payout involves proactive financial management. Refinancing, making extra payments, opting for a shorter loan term, utilizing an offset account, and negotiating with your lender are all strategies that can help you save significantly on interest.
Pankaj Mathpal, Investment Advisor and Founder-Managing Director, of Optima Money Managers, said that those taking home loans can definitely reduce their interest payout by making small investments into different instruments available in the market.
Investment Into SIP
Pankaj Mathpal said that investing in mutual funds through SIP is a good idea as it can yield high returns in the long term. This helps reduce the loss incurred towards interest payment. Mathpal suggested people increase their SIP amount every year, so to help not only overcome the loss but also make some gains.
The 10% Rule
The investment advisor suggested that borrowers should try to follow the 10% rule. As per the 10% rule, one should make a SIP of 10% of their home loan EMI amount. Suppose, for a home loan of Rs 30 lakhs at the rate of 7.9%, your home loan EMI is Rs 25,000 per month for 20 years. Then, you should invest at least Rs 2,500 in mutual funds per month for 20 years.
After 20 years, you would have repaid the home loan with Rs 30 lakh principal and around Rs 30 lakh interest. Thus, a home loan of Rs 30 lakh costs Rs 60 lakh. Now, the SIP of Rs 2,500 per month for 20 years returns around Rs 28,64,000 (Rs 6 lakh investment + Rs 22,64,000 return) at the rate of 13%. Thus, if adjusted against the EMI, it almost mitigates the interest paid to the bank as the interest paid to the bank on the home loan stands around Rs 1,36,000 (Rs30,00,000-Rs 28,64,000). Thus, your effective interest rate goes down below one per cent.
13 EMIs A Year
Pankaj Mathpal suggested that if a person is not willing to make any investment, then he/she should follow the 13 EMI rule every year. He said that the borrower should make an extra payment equivalent to one EMI every year. In this way, the 20-year loan can be repaid in around 16 years while saving around Rs 5 lakhs on the interest.
Increase EMIs Every Year
Pankaj Mathpal further shared that if the borrower is not interested in any of the two concepts, then he/she can opt for increasing the EMI every year if salary/income increases. He shared that increasing the EMI amount by 10% every year could also lead to significant savings while helping repay the loan much before the tenure. He said that if the EMI was Rs 25,000 per month, then it could be increased to Rs 27,500 per month from the next year, Rs 30,250 from next to next year and so on.
No Risk Investment
Those not willing to take the risk and want an assured return can go for PPF or Fixed Deposits. While PPF has an upper ceiling of Rs 1.5 lakh per year for 15 years, the interest rate is 7.1%. On the other hand, the FDs offer an interest rate of between 5-8 per cent depending upon the amount and tenure. If you invest Rs 10,000 per month or Rs 1,20,000 per year, then you would get around Rs 32,54,000 (including the investment amount of Rs 18 lakhs) after 15 years. You could further invest this Rs 32 lakh into the FD for five years and may earn an interest of around Rs 12,00,000 at the rate of 6.5%. Thus, at the end of 20 years, you would have Rs 44,17,343.
