How to Make Your Home Loan Interest-Free with a Simple SIP Strategy
A small monthly SIP can yield significant long-term results. Read on to understand how.
If you're planning to take a home loan or have recently availed one, you might be concerned about the hefty interest payments that often exceed the principal amount. But what if there was a way to offset those interest costs through a simple, consistent SIP (Systematic Investment Plan)?
In this article, we'll show you how regular SIP contributions can help you recover the interest paid on your home loan over its tenure.
Let’s consider an example: Suppose you take a home loan of Rs 25 lakh at an 8.5 per cent interest rate for a tenure of 20 years. Your monthly EMI would be approximately Rs 21,696, totaling around Rs 2.60 lakh annually. Over 20 years, you’ll pay approximately Rs 52.07 lakh to the bank.
Out of this Rs 52.07 lakh, Rs 25 lakh is your principal, and Rs 27.07 lakh is interest—making up about 52 per cent of your total repayment. Now, let’s see how an SIP can cover that Rs 27.07 lakh interest component, effectively making your loan interest-free.
Here's how it works:
Invest in an index fund SIP with a monthly contribution of Rs 2,500, which is just 0.01 per cent of your loan amount. This translates to Rs 30,000 annually and Rs 6 lakh over 20 years, aligning with your loan tenure.
Assuming an annual return of 15 per cent, your SIP would grow to approximately Rs 33.18 lakh by the end of 20 years. Out of this, Rs 27.18 lakh would be returns, effectively covering the Rs 27.07 lakh interest on your home loan.
While this example uses an index fund, similar strategies can be applied to Small-Cap, Mid-Cap, or Large-Cap funds. However, each category requires careful analysis before investing.
In conclusion, a disciplined SIP of Rs 2,500 per month can offset your home loan interest. The key is consistent contributions without interruption, allowing compounding to do its magic.
Disclaimer: The article is for informational purposes only and not investment advice.