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Home Loan: With an amazing trick of SIP, you can make zero interest on home loan of Rs 50 lakh in 12 years. But market risk and long term discipline is necessary in this. Banks charge for prepayment, but in most floating rate loans there are no charges for individuals. The fixed rate may be up to 2 percent.
Home Loan: Everyone dreams of buying a house, but if someone takes a home loan of Rs 50 lakh, the tension of interest starts. In 20 years, you have to pay about Rs 1 crore 7 lakh to the bank, out of which Rs 57 lakh is only interest. But there is a smart way by which you can make your home loan interest zero.
This is the method of prepayment of loan using SIP i.e. Systematic Investment Plan. Suppose you take a home loan of Rs 50 lakh and the EMI every month for 20 years at 8.5% interest will be around Rs 43 thousand 391. That means the total payment will be Rs 1 crore 4 lakh 13 thousand in which interest will be Rs 54 lakh 13 thousand.
This trick of SIP will be useful
Now talking about smart trick, you can invest the tax refund you get every year and the TDS refund saved on the principal payment of home loan in SIP of mutual funds. In the first year, the principal portion of your EMI is around Rs 2 lakh 9 thousand, on which you will get a refund of Rs 62 thousand 700 in the 30 percent tax bracket under section 80C and 24B.
Put this refund in SIP every year where you can expect 12% return. Start SIP of Rs 62 thousand 700 in the first year. Then the refund will increase next year as the principal payment increases. About Rs 65 thousand refund will be available in the second year. In this way, keep increasing SIP every year. In 20 years, around Rs 1 crore 13 lakh will be accumulated through your SIP. Now prepay some part of the loan from this fund every year. With this, the tenure of the loan will be reduced and interest will also be saved.
You will get so much from SIP of Rs 10 thousand every month
According to the report of Financial Express, if you do this then your loan can be completely exhausted by the 12th year. The total EMI payment will be only around Rs 52 lakh and the interest will be zero. This means that even after taking a loan of Rs 50 lakh, you will have to repay only Rs 50 lakh. But keep in mind, this is based on 12 percent return which is possible in equity mutual funds but not guaranteed. And there is market risk in this also.
Another way is to start SIP of larger amount. For example, if you get 12% interest on a SIP of Rs 10,000 every month, then Rs 83 lakh will be accumulated in 20 years. Make prepayment every year with this. This will also finish the loan sooner. Banks charge for prepayment, but in most floating rate loans there are no charges for individuals. The fixed rate may be up to 2 percent.
This strategy works with the power of tax saving refund and compounding. Refund increases every year, SIP increases, fund grows and prepayment reduces interest. But it demands long term discipline. If the market remains down then returns may be less. Still, an average of 12 percent equity can be achieved.
