Home loans can be of 10, 15 or even a 25-year tenure. The higher the duration, the more interest you pay on a home loan. Let us say you have a home loan of Rs 50 lakh at nine per cent interest for 20 years. In that case, you could pay an interest amount of almost Rs 58 lakh, more than the house's accrual price.
High-yield investments can generate enough returns to cover the loan's interest rate. Likewise, investing in a mutual fund systematic investment plan (SIP) can help recover your interest over the years.
Let us take an example.
Say you have a Rs 30 lakh loan for 20 years at nine per cent. Over 20 years, you pay Rs 34.78 lakh as your interest. It means, overall, you repay Rs 64.78 lakh over 240 months. If you invest Rs 3,000 per month in a SIP that provides returns at a 15 per cent compound annual growth rate (CAGR) over 20 years, by the time you close your loan, the additional Rs 3,000 would have grown to Rs 39.90 lakh.
Even subtracting your contribution, you would still have accumulated Rs 32.68 lakh. Assume you make the same amount as prepayment every year, i.e., you pay Rs 36,000 every 12 months. In this case, your interest comes down to Rs 25.67 lakh and your tenor becomes 15.5 years. It is a saving of Rs 7 lakh and 4.5 years.
“So the amount you can put together in 20 years with a 0.01 per cent of your loan amount invested every month in a mutual fund via a SIP can help you put together a corpus larger than your total interest payout,” says Adhil Shetty, CEO, BankBazaar.
But getting 15 per cent consistently for 20 years is a far-fetched notion, and one must be realistic while setting that expectation.
“So while one should regularly invest to avoid the effect of interest payments, but they should also try to prepay loan with an increase in income or annual bonuses or any such windfall to reduce the interest outgo,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm.
Other Ways To Reduce The Cost Of A Home Loan
“While it is not possible to completely eliminate the interest on your home loan, there are certain strategies that can help reduce the interest burden,” says Atul Monga, CEO and co-founder of Basic Home Loan.
One way is to make a larger down payment or prepay the loan whenever possible, as this reduces the principal amount and, in turn, lowers the interest paid.
"Taking advantage of tax deductions under the old tax regime is another way to reduce the overall cost of borrowing. In some cases, borrowers can also consider transferring their loan balance to a lender offering better rates. This can potentially save on interest payments, but it is important to consider the costs and fees associated with a balance transfer," says Monga.
Also, in cases of increasing home loan rates, borrowers can approach their lender to restructure the loan by either reducing the total amount owed or extending the loan tenure.
