While many individuals take out home loans when purchasing a property, there are still a lot of individuals who either do not take out loans or take a small loan and pay the remainder in cash because they do not want to be burdened by an EMI or pay interest.
If I were to buy a house, though, I’d make a minimal down payment possible and borrow the maximum amount possible. Here’s why:
With a little forethought, I can not only retrieve my interest but also make money, making my home not only interest-free but also less expensive. Bear with me as I do some number crunching in this article.
Suppose I wish to purchase a home for Rs. 50 lakhs. I also have Rs. 15 lakhs to pay ahead. Therefore, I take out a loan for Rs. 35 lakhs.
Instead of a 35-lakh loan, I now take out a 40-lakh loan. It means I simply have to pay Rs. 10 Lakhs in advance! (Many banks and builders may approve it if you have a good credit score)
At the present rate of interest, I’d pay a total of Rs. 33.28 Lakhs interest over 20-years.
This is where the fun begins: If I invest the remaining 5 lakhs on the day I start my EMI in a Mutual Fund that provides me an average annual return of 12%, the total return after 20 years will be 48.23 lakhs.
So, after 20 years of paying a total of Rs. 83.28 Lakhs (Down Payment + Principal + Interest) for a loaned home. My mutual fund investment of Rs. 5 lakh has already yielded Rs. 48.23 lakhs. As a result, the house will cost me Rs. (83.28 – 48.23) = 35.05 Lakhs!
The reason for this is that while a home loan is the cheapest credit available, with interest rates as low as 6.8%, smart equity investment can yield returns of anywhere between 10% and 15%. Over 20 years, the margin between the loan rate and the return rate compounds to provide a much higher return than the interest you pay.
Written by: CA Suraj Kar
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