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Kolkata: Buying a house is easily the biggest financial transaction that an average Indian conducts in his/her lifetime. The most significant question that confronts an individual when he/she plans to buy a dwelling unit -- a house or a flat -- is how much of the cost should be funded form one's own pocket and how much of it should be funded through a home loan.
One option available to any individual is to amass a certain amount by investing an amount equal to the EMI in mutual fund SIPs and then buy the house later. There are a lot of dynamics involved in such a situation -- the rate of growth of real estate in the area where you want to buy a home/flat, the returns that you can generate through mutual fund SIP and the time that the SIP will take to generate the desired amount. Let's have a look at the numbers.
Let’s assume that the cost of the house/flat is Rs 1 crore. The buyer makes a down payment of 20% ie, Rs 20 lakh and takes a loan of Rs 80 lakh to fund the purchase. The rate of interest is 8% on a repayment period of 25 years. (We have assumed the rate of interest which is within the band offered by State Bank of India for the calculation.) In this instance, the figures are as below:
EMI paid by borrower: Rs 61,745
Total interest payable over the repayment period: 1,05,23,589 (Rs 1.05 crore)
Total amount to be repaid = Rs 1.85 crore
This method will depend on the amount of returns generated over a 10-12 year time period with a SIP of Rs 61,745. Let's do the calculation with the help of a mutual fund SIP calculator.
The calculator shows that a monthly SIP of Rs 61,745 over a 12-year period assuming a 12% return in the mutual fund schemes will generate a value of about Rs 1,98,97,461 (Rs 1.98 crore). In 15 years, the amount will balloon to Rs 3,11,55,045 (Rs 3.11 crore).
Before one compares the pros and cons of the two approaches, a few calculations are still required. The value of the real estate will rise in the 15 years. Assuming a 5% rise in prices, the cost will reach about Rs 2.08 crore. Also one has to pay a rent in the 15 years to live (assuming the buyer does not have an ancestral house to live etc). Assuming the rent to be around Rs 20,000/month, the individual will spend not more than Rs 53-54 lakh. Therefore, the two taken together will account for Rs 2.61-2.62 crore. Therefore, the individual will be left with a significant amount of Rs 50 lakh or so if the second strategy is adopted.
However, the advantage of taking the loan is one can enjoy the house from the beginning, which won't be possible if the individual wants to invest and build a corpus to fund the home. The disadvantage is the big EMI will become an amount that the borrower has to pay up every month irrespective of the financial situation. One needs to consult a qualified personal finance advisor before taking a final decision on such a complicated situation.
(Disclaimer: (Disclaimer: This article is only meant to provide information. TV9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, REITs, INVITs, any form of alternative investment instruments and crypto assets.))
