Home – A place not only built with brick and mortar, but made with dreams, emotions and lifelong hard-earned savings.
No matter where you are in the world, you always want to come back to the comfort and security of your home at the end of the day. Everybody dreams of owning a house.But when the time comes to actually buying ahouse, the skyrocketing real estate prices alongwith high home loan interest rates and the impending EMI burden scares off buyers. Often, buyers could end up biting off more than they can chew if they plan a property purchase without sufficient planning of their finances.
For most people, it is close to impossible to fund the purchase of their property entirely through savings and financial planning alone. Real estate prices are generally headed in only one direction – upwards, so buyers have to opt for a loan from banks or housing finance companies. Where financial planning can help is in perhaps reducing the amount of loan the buyer takes. In fact, buyers should avoid funding a large part of the purchase through loans or else, they might end up spending many years of their life just paying back the EMI (Equated Monthly Instalment).
The EMI then ends up becoming a sizeable portion of your monthly expenditure. So, even if your expenses remain the same, an unexpected emergency (medical, financial or job loss) could cause a serious dent in your finances. In that case, your dream house might just end up looking like a nightmare of a liability.
All of this is not to say that buying a house is a debt-trap. Planning your finances around the purchase of a house can save people a lot of heartache and worries about ensuing liquidity crunches. To begin with, if you know you want to own a house start planning for it as early as you can. Save for a few years before the actual purchase of the house. While there are many ways on how to plan your finances, this article will focus solely on using an SIP or Systematic Investment Plan, followed by the SWP or Systematic Withdrawal Plan route to efficiently pay off your EMIs.
SIPs to SWPs to EMIs
SIP is a feature which allows you to invest a certain amount periodically (weekly, monthly, quarterly, half yearly or yearly) for a chosen number of years. SIP investment in equity funds over a long period helps generate inflation beating returnswhile SIP in hybrid funds helps to create wealth through equity investment while providing acushion against potential uncertainties through debt investment. So, choose your investments based on your requirement, your risk-taking ability and the time horizon. Best is to consult a financial advisor for help with selecting the right mutual fund.
Now, let’s take an example of a 7-yr SIP investment done before applying for a home loanof Rs. 50 lakhs.
First, the home loan calculation:
|Loan amount||Rs 50,00,000|
|Loan tenure||15 years|
|EMI amount||Rs 47,782/month|
|Total amount payable (principal + Interest)||Rs 86,00,800
(50,00,000 + 36,00,800)
*Home loan interest rates are based an approximate average of current rates
Now, let’s understand the SIP investment before taking a home loan
|SIP amount||Rs 25000|
|Period of investment||7 years|
|Total amount invested||Rs 21,00,000|
|Gain amount||Rs 8,74,335|
|Total redeemable/maturity amount||Rs 29,74,335|
The corpus accumulated within 7 years through the SIP can significantly lessen the burden of EMI payment in the future.How? Through an SWP (Systematic Withdrawal Plan).
SWP facility helps to withdraw a specific amount at a pre-decided interval(weekly, monthly, quarterly, half yearly or yearly)from an existing investment corpus, while the rest of the amount stays invested and continues to grow. By using the corpus built through the SIP, you can start an SWP whereby you withdraw an amount equal to the value of your EMI from the investment made.
The table below shows how anSWP done at monthly interval helps to make the home-loan EMI payment from the corpus built via the 7-yr SIP.
|Accumulated SIP corpus||Rs 29,74,335|
|SWP amount(equal to EMI amount)||Rs 47,782|
As we can see from the above calculation, the SWP can ease your EMI burden for about 6 years which covers almost 40% of the total loan repayment tenure. Assuming that the remaining corpus continues to grow at 8% throughout the SWP period, theneven after paying 6 years of EMI, you will be left about Rs 3.4 lakh from your initial corpus of Rs 29.7 lakhs. The compounding effect in SWP helps the corpus to grow further while easing out the burden of EMI and not causingmuch of a liquidity crunch.With the above illustration we can see that with the right tool of investment and right preparation, youcan help to build a corpus to meet the EMI that will come up later.
Proper financial planning and preparation can make even the most daunting of financial goals a smooth and easy ride. But for that you must start early and align all your other goals in pursuit of it. It takes a bit of restraint and sacrifice but over the long-term it can be extremely rewarding.