From building up the initial corpus to finance the down payment, to helping close the loan sooner by pre-payment or foreclosure, your SIPs can come handy
Buying your own home is one of the biggest financial goals, and usually the most expensive one. With the huge costs associated, a home loan is usually required to fund a major part of it. Investment in mutual fund systematic investment plans (SIPs) can be helpful in planning the home purchase, both before and after taking the home loan.
To fund the down payment
Usually, you would be required to pay 10-25% of the home loan’s amount as down payment. If you are planning to take a home loan in next 5-7 years, you must begin investing in mutual funds via SIPs to accumulate corpus for the loan’s down payment. When you invest through SIPs for medium to long-term investment horizon, the power of compounding comes into play, which assists in building the desired corpus.
For instance, you are planning to purchase a home costing Rs 1crore in next five years. Assuming that you would be required to pay a down payment of 25%, you would need to create a corpus of Rs 25 lakh for that. A Rs 25-lakh corpus with five- year investment horizon would require SIP of around Rs 30,000 per month, if the returns are expected at 12%.
Once you have accumulated the down payment amount, you can apply for a home loan through online financial marketplaces offering comparison amongst various lenders, to choose the most suitable lender for your home loan.
To close your home loan sooner
Since home loans generally involve huge amount, which is usually about 5-10 times the borrower’s annual income, the availability of long repayment tenures often leads to home loans stretching up to 30 years, which occupies a major portion of someone’s work life years. To shorten your home loan tenures, from 25-30 years to, say 15 years, start building another corpus, which would assist in closing your home loan sooner, by prepayment or foreclosure.
To build such corpus, borrower should start investing at least 10-20% of monthly EMI amount in mutual funds through SIPs, which would grow over time and help accumulate a corpus to prepay the loan, either partially or fully.
Let’s take an example. Cost of house: Rs 1 crore, down payment: Rs 25 lakh (25%), loan amount: Rs 75 lakh; loan tenure: 25 years, EMI @8.5% interest rate: Rs 60,392.
Monthly SIP amount (about 15% of EMI): Rs 9,500. Approximate corpus accumulated for prepayment/ foreclosure after 15 years (assuming 12% returns): Rs 47.46 lakh. Outstanding loan amount after 15 years of loan tenure: Rs 47.12 lakh. The calculation shows how one can foreclose a 25-year home loan in 15 years, by accumulating a corpus through SIP investments. This would also help in saving the overall interest payout, by serving
the home loan for just 15 years, instead of 25 years.
Investing through the SIP route for accumulating the two corpuses, one for the down payment and other one for prepayment or foreclosure of home loan, would require an early start. The earlier you start investing through SIP, the more time you allow for your money to grow over time. Moreover, you would be able to enable the power of compounding to provide greater returns.
Opt for direct plans
Direct plans enable the investor to purchase mutual funds directly from the fund houses, unlike regular plans wherein intermediaries and fees associated with them is involved. Direct plans provide higher returns, higher NAVs and a lower expense ratio than regular plans.
Review your portfolio
Since building a corpus for your dream home requires long-term investing, you need to periodically review the portfolio, to track your chosen funds’ performance. In case your existing funds have been underperforming consistently since few years (about 2-3 years), have changed their fund managers or management style, you need to exit such funds. To judge your funds’ performance, compare it with the benchmark indices and other peer funds in its category.
-Manish Kothari is director & head of mutual funds, Paisabazaar.com