Leverage SIP to Counterbalance Your Home Loan Interest and Save Big

Loans are often the only way for middle-class families to achieve big dreams like buying a car or a house. People take loans from banks to fulfil these dreams. A large part of their salary goes into paying the EMI of these loans. The monthly EMI can feel heavy, and everyone wants to get rid of it as soon as possible.

If you are tired of living in a rented house and want to buy your own, you may need a loan if you don't have enough money. Often, people end up paying more interest on the loan than the amount they borrowed. But what if you didn't have to pay interest on a home loan? This is possible with a better option called SIP.

SIP stands for Systematic Investment Plan. It is a facility provided by mutual funds. You invest a fixed amount through SIP at regular intervals. SIP is great for long-term investments. You can choose daily, monthly, or annual SIPs, which can prove to be profitable over time.

A home loan is expensive because it is taken for a long period, usually 15-30 years. This long-term loan means you end up paying more interest to the bank. For example, if you take a home loan of Rs 70 lakh for 20 years at an interest rate of 9%, you will pay Rs 81.15 lakh in interest alone.

That means your total repayment amount will be Rs 1.51 crore, with a monthly EMI of around Rs 62,981. To recover the interest on the home loan, SIP is a good option. You can choose an equity mutual fund and do SIP of only 0.1% of your home loan amount.

If your home loan is for 20 years, then your SIP should also be for 20 years. For a loan of Rs 70 lakh, you will need to do an SIP of Rs 7,000 every month for 20 years. If you get a return of 15% from your equity fund, in 20 years you will have invested Rs 16.8 lakh and could get a return of around Rs 1.06 crore.

This includes both your principal and return. In this way, in 20 years, you paid an interest of Rs 81.15 lakh on a home loan of Rs 70 lakh. But through SIP, you invested Rs 16.8 lakh and got a total return of Rs 89.2 lakh.

Even after deducting the total interest on the home loan from this amount, you will still have a return of around Rs 8 lakh. You can adjust this figure according to the amount and duration of your home loan.

For example, if you have taken a loan of Rs 25 lakh for 20 years, then you will need to do an SIP of Rs 2,500 every month for 20 years.