There are two kinds of people.
- Those who think that the hip way to make money is to use OPM (other people’s money) and don’t lose sleep over it at all.
- Those who think that debt is the cause of all tensions and illnesses! (I am from this group)
This writeup is for the second class of people.
I was talking to a loan agent the other day and he was telling me that he was going after loans in the 20 – 25 lacs category very strongly. That was because most 50 lac + loans are routinely repaid in 5 years whereas loans in the lower category run their full tenure.
Essentially a home loan is a subsidised loan given to you. If you repay it, you not only lose a subsidised loan, but also lose quite a few tax breaks. Also, if you repay the loan and due to some reason, you need money in a hurry, it will be difficult to get another loan.
So, is there another way? Give a thought to the example below:
Say, one wants to take a loan of Rs.50 lacs at 9.5% interest for a 10 year tenure. The EMI for such a loan (as per the ICICI EMI calculator) is 64,698.
I would suggest to take the same loan for a 30 year tenure. In that case, the EMI would be Rs.42,042.
The difference in EMIs is Rs.22,644.
Pay off the loan as if you are paying in 10 years – every month make a payment of Rs.64,698. Only difference would be that you would pay Rs.42,042 to the loan company towards the EMI and the remainder of Rs.22,644 to a mutual fund SIP.
A SIP of Rs.22,644 per month amounts to an investment of Rs.2,71,728 a year.
At a 12% return per annum, this SIP will be worth slightly more than 50 lacs around the 10 – 11 year mark. At that stage, you have the choice to repay the remaining part of the loan with this money, but why should you? As far as India is concerned, the interest rates that will apply to home loans will reduce quite a bit and almost every pundit worth his salt, is predicting that Indian stocks will go up.
Though 12% seems a bit high, there are several mutual funds that have given returns well over 12% over a 10 – 15 year period.
Yes, I know that past performance is no guarantee of future returns and yes, there is always a chance that the stock market will crash and the investment will lose value. But every investment carries some risk – the trick is to understand the risk. Markets drop substantially, but till date I’ve seen that they always recover.
What happens if one decides to go ahead and keeps paying the EMI + SIP for the 30 years? Not only will the loan be paid up, but you will have 6.5 crores in savings!!
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Resolving to surprise her husband, an investment banker’s wife pops by his office. She finds him in an unorthodox position, with his secretary sitting in his lap. Without hesitation, he starts dictating, “…and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair!”