Home Loan is one of the major loans of the Indian household. Rising real estate prices have made this dream of apna ghar quite costlier. This dream becomes even more expensive if you are planning to purchase a house in metro cities.

As a thumb rule, the cost of the house should not be more than five times your gross annual income and the Home Loan EMI should not be more than 50% of your take-home salary.

So, once you find a house that meets these criteria, the process of a Home Loan starts. What if, there is a way through which you can make your Home Loan completely interest-free?

Let’s understand how this works.

Home Loan Calculation

Suppose you have taken a Home Loan of 50 Lakhs at an interest rate of 8% for 20 yrs

Have you noticed that the interest component itself is more than the loan amount?

The SIP route

To make this loan completely interest-free, you have to start doing a SIP along with your EMI. You might be thinking that this has doubled the load on your pocket. But, you have to do a SIP of only 0.1% of your loan amount. In our example, it comes to a mere Rs. 5,000.

Where to invest these funds?

You have to do SIP for the tenure of your loan (in our example, 20 yrs). You can invest these funds in Mutual Funds or Index Funds. For such a long term, generally, a mutual fund gives an annualized return of around at least 12% to 15%. 

Calculation of Return on Investment

Continuing with the example, you did a SIP of Rs. 5000 for 20 years and say earned an annualized return of 15%.

So, you earned a total return of around Rs. 63.79 lakhs while paid an interest of around Rs. 50.37 lakhs

This has not only made your home loan interest-free but also gave you an additional return of Rs. 13.42 lakhs. 

To be concluded

By just investing a meagre amount of your loan amount, you can make your big fat home loan interest-free. This is the power of compounding and consistent investing. You can further lower your interest rate to around 7% if you are a woman loan applicant. Though, the woman applicant has to salaried employee or self-employed to be eligible for a home loan. A lower interest rate on the home loan would further increase your returns.