Home Loan: You will get back all the interest paid along with the principal amount! Just do this as soon as the loan starts..

Taking a home loan is the easiest way to fulfill your dream of owning a house in today's times. But this dream also brings with it a long financial burden, which dominates you for many decades. You buy a house with a loan, but when you calculate the total amount paid, you find out that you have paid almost double the price of the property.

The biggest reason for this is the huge interest that you pay for years. But imagine if there was a way by which you could get back the entire money of both the principal and interest paid by you, how would it be? This is not a dream, but a smart financial plan, which is done through SIP, i.e., Systematic Investment Plan. If you do a small thing as soon as the loan starts, then at the end of the loan, you will not only be debt-free, but you will also have the same amount in your hand as you had paid to the bank, including interest. Understand the whole math in detail here.

First, understand the burden of home loan interest.

Before understanding this strategy, it is important to know how big the burden of interest on a home loan is. The longer your loan tenure, the more the interest amount increases. Even though your EMI becomes smaller, the total money out of your pocket is very high.

Let's understand this with an example. Suppose you have taken a home loan of Rs 30 lakh and the current interest rate is 9.55% per annum.

If the loan is for 15 years, then you will pay a total of ₹56,55,117 to the bank. (Interest: ₹26,55,117)
If the loan is for 20 years, then you will pay a total of ₹67,34,871 to the bank. (Interest: ₹37,34,871)
If the loan is for 25 years, then you will pay a total of ₹78,94,574 to the bank. (Interest: ₹48,94,574)

You can see that by increasing the tenure by just 5 years, you have to pay additional interest of lakhs. SIP can prove to be an excellent weapon to recover this huge cost.

What is the 'SIP formula' for home loan recovery?

The principle is very simple: "Investment with debt". From the day your home loan EMI starts, you have to start a SIP in a mutual fund on the same day. Your goal is that when your home loan ends, the total value of your SIP investment should be equal to or close to the total amount you have paid to the bank. For this, you have to invest about 20-25% of your EMI amount in SIP every month.

Understand through calculations how you can get your entire money back.

Let us take the example of the 20-year loan given above and see how this formula works.

Home loan details

Total home loan: ₹30,00,000
Loan tenure: 20 years (240 months)
Interest rate: 9.55% p.a.
Monthly EMI: ₹28,062
Total interest paid: ₹37,34,871
Total payment to bank in 20 years: ₹67,34,871
Now planning SIP investment

SIP amount: 25% of EMI (25% of ₹28,062 = ₹7,015 per month)
Investment tenure: 20 years (240 months)
Estimated return: 12% p.a. (This is considered an average return in equity mutual funds over a long period)

Result after 20 years.
According to the SIP calculator, investing ₹7,015 every month for 20 years will give you, At 12% annual return, your total fund will be ₹64,52,799, which is very close to the total cost of the principal and interest of the home loan. On the other hand, if by chance you get a better return, that is, up to 15%, then in 20 years your total fund will be ₹93,09,420, which is much more than the price paid in the home loan.

How to decide the amount of SIP? And the magic of 'Step-up SIP'

It may seem a bit difficult to invest 25% of the EMI in the beginning. So what to do? The solution to this is "Step-up SIP". In this, you start with a small amount (like 10% or 15% of the EMI) and every year as your income increases, you increase your SIP amount by 5% or 10%. This method is even more powerful. For example, if you start with a SIP of just ₹5000 and increase it by 10% every year, you can create a huge fund in 20 years. If you get a return of even 12%, then you can create a total fund of Rs 93,15,692 during the 20-year SIP.

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