Housing Loan
Column
Home Loan Without Tears
Sandip Mukherji
Try harnessing an arbitrage opportunity – a good diversified
mutual fund can offset pressures of repaying a home loan
T
oday’s young salaried people have many
aspirations. In their to-do list, after swanky
phones and cars an important element
is buying a home. Fortunately today, the
prices of real estate are at rock bottom, and it is a
buyer’s market unlike a seller’s market few years ago.
I will call a home an appreciating asset rather than a
depreciating one like phones or cars. Anyone prudent
enough to invest in a property is doing the right thing
for posterity. The banks and non-banking finance
companies (NBFCs) today are offering home loans
readily to the young generation. However, the EMI
payments are long drawn out and may get tedious in
the long run, so I would like to suggest a means to
make this process of repayment a little less mundane
by repaying the loan early, that too, without burning an
extra hole in your pocket.
Before explaining the concept, let me also tell you
that we will consider values that are prevalent in the
markets today and we have also used the normal
amortisation and SIP calculator available from the
Internet. The figures are, therefore, only approximate
and customised as per your specific need.
The whole concept is based on the arbitrage
opportunity which is provided by a home loan at 8.35
per cent and a CAGR return of 15 per cent of a good
diversified mutual fund. The concept is more important
than the actual calculations here. You can play around
with the calculations from the Internet for your own
requirement, or consult your financial advisor.
The assumptions are that today a home loan is
available at 8.35 per cent per annum (reducing per
month, which comes to approximately 5.25 per cent
flat per annum) for 20 years or 25 years on a loan of
`50,00,000 (`50 lakh only) and the CAGR returns for a
Most home loan providers do
not charge any prepayment
penalty charges
40
Outlook Money July 2018 www.outlookmoney.com
good diversified mutual fund is about 15-18 per cent
per year (the BSE Sensex has delivered 17 per cent
compounded annually since its inception in 1980).
Now let’s say the average tenure of a home loan is
20-25 years. If you are looking for a home loan for 20
years on an amount of `50 lakh, the EMI is going to
be approximately `42,900 per month. I am suggesting
that you opt for a tenure of 25 years where your EMI
is going to be `39,750 per month and invest the extra
`3,150 in a SIP scheme of a good diversified equity
mutual fund. You end up paying `42,900 per month
as you would have paid in case you would have opted
for 20 years tenure of home loan.
The only difference is that in this case you also
have a SIP running concurrently for a tenure of 17
years as well. The SIP of `3,150 becomes `29,61,339
after 17 years whereas you only need to pay
`27,77,268 for foreclosing your home loan in 17 years
instead of 20 years as you had decided initially. You
will still be left with `1,84,071 and a running SIP
and a real estate asset. You also would have saved 36
months EMI of `39,750 amounting to `14,31,000.
The actual foreclosure amount will be less than what
I have mentioned as you will also save three years of
interest payment.
There are few important points which I need to
bring to your notice; most of the home loan providers
do not charge any prepayment penalty charges.
I have presented this example to explain the idea
and the figures are only for illustration purposes.
I have not taken into account the 10 per cent long
term capital gains (LTCG) of mutual fund return into
account, as I believe they will be offset against the
saving from the interest of the three years that you
have prepaid early.
I hope this idea can take away some pain of
repaying back a home loan and the logic of using the
SIP route for any kind of goal planning.
However please consult your financial wealth
advisor for customising the concept for you.
The author is Wealth Advisor & Founder, Tangerine Ideas