SIP trick to make your home loan interest-free; Complete details inside!

A small monthly SIP can showcase its performance exceptionally in the long term. Read the complete article for a better understanding of how.

Planning to take a home loan or have recently taken one? You might be worried about the interest portion of your home loan, which generally surpasses the principal amount you borrowed for purchasing or constructing your dream home.

In this article, we are going to explore how one can cover the interest expenses incurred during the home loan tenure through simple and regular SIP contributions.

For calculation purposes, let's use an example: You've taken a home loan of Rs 25 lakh at a rate of 8.5 per cent with a tenure of 20 years. This results in a monthly EMI of Rs 22,493, totaling Rs 2.70 lakh annually. Over the 20-year loan tenure, you'll end up paying the bank around Rs 54 lakh in total.

Out of the total of Rs 54 lakh, Rs 25 lakh represents the principal amount, while the remaining Rs 29 lakh is the interest portion, accounting for approximately 54 per cent. Now, let's focus on calculating the SIP part, which is crucial to covering the interest portion of the home loan and making the loan interest-free. The home loan interest amounts to around Rs 29 lakh, so to make our loan interest-free, we need to generate returns exceeding Rs 29 lakh.

Also read Are you still investing in simple SIPs? Explore different varieties of SIPs to increase your returns and minimize risks!

Here's the trick: Invest in an SIP in an index fund, with the amount set to at least 0.01 per cent of the loan amount, which in this case amounts to Rs 2500 per month. It sounds simple, right? Handling just a small SIP of Rs 2500 per month is easy, totaling around Rs 30,000 annually. The total investment amount over the 20-year tenure amounts to Rs 6 lakh, which matches your loan tenure.

To cover the interest expenses of your home loan, the fund should generate an estimated return of 15 per cent annually. Then, your SIP of Rs 2500 per month would allow you to build a total corpus of Rs 37.90 lakh, with the return portion being Rs 31.90 lakh from the total investment amount of Rs 6 lakh over 20 years. In terms of absolute value, that's a 531 per cent multibagger return in the same period. One can indeed apply similar strategies to Small-Cap, Mid-Cap, and Large-Cap funds, but thorough analysis is crucial for each category.

So, in conclusion, with just Rs 2500 per month of SIP, one can cover the expenses of interest in the home loan. The only thing required from the investor's side is consistency in contribution towards the SIP investment without any gap and let the investment work its wonders.