Difference Between Home Loan vs SIP

home loan vs sip

6 mins read

Last updated on 11th June 2024

Banks and financial institutions commonly provide home loans. These loans have a longer duration and lower interest rates compared to personal or credit card loans. Even though the loan amount can be very high, the monthly repayment, known as EMI, brings it down to smaller money. However, it does take up a large part of a person's monthly earnings due to the high cost involved. 

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Many people want to clear their mortgage quickly to avoid debt, instead of putting that money into mutual funds or other investments. The question of whether to prioritize monthly loan payments (EMI) or systematic investment plans (SIP) is a frequent concern for new home loan takers. 

Let's explore the key points of home loan vs sip to help you make an informed financial choice!

What Is a Systematic Investment Plan (SIP)?

The Systematic Investment Plan (SIP) is a way to invest in Mutual Funds. Instead of investing a large sum at once, you can invest a fixed amount regularly, like monthly or every three months. It's similar to making regular deposits in a bank, and you can start with as little as INR 500 per month. You can even set it up so your bank automatically debits this amount.

SIP is popular among Indians as it allows steady investing without worrying about market changes. For many, SIPs in mutual funds are a great starting point for investing.

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Situation 1: Increasing Home Loan EMI

Imagine you've secured a home loan of ₹60 Lakhs for a 25-year duration at a 9% annual interest rate. Your monthly repayment would be approximately ₹50,000, and over the loan's lifespan, you'd end up paying an interest of around ₹91 Lakhs.

Now, if you get a yearly raise, consider increasing your monthly repayment by 6% each year. This strategy could help you save nearly ₹24 Lakhs in interest and cut down your loan duration by almost 8 years.

For those wondering how to clear home loan faster, this is a viable strategy.

Under income tax regulations, there are provisions for tax deductions related to home loans:

For the principal amount you repay within a financial year, you can claim a deduction of up to ₹1.5 lakhs under Section 80C.
For the interest you pay on the loan annually, you can claim a deduction up to ₹2 lakhs under Section 24(b).

Suggested read: Reduce home loan EMI

Situation 2: Enhancing Your SIP Contribution

Consider starting a Systematic Investment Plan (SIP) by allocating ₹50,000 each month into an equity mutual fund for 25 years, anticipating an average growth rate of 10%. If, with each passing year, you decide to augment your SIP by 4% due to an increase in your income, your accumulated savings by the end would reach approximately ₹8,74,37,297.

The comparison between increasing your EMI and boosting your SIP investment highlights two distinct financial strategies. On one hand, increasing your EMI can lead to savings on interest and a quicker completion of your loan. On the other, consistently raising your SIP contributions can help build a substantial fund for future needs.

It's essential to weigh the potential returns from your investments against the interest costs of your loan. If your main objective is long-term savings, like for retirement, then consistently investing in a SIP might be the right move. However, if you're keen on settling your home loan swiftly, then opting to increase your EMI could be more beneficial.

Tools like the sip and home loan monthly emi calculator or you can say home loan sip calculator can help you compare the benefits.

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Home Loan vs SIP: Key Differences to Determine the Best Choice for You

  1. Financial Foundations: Before deciding between a home loan or SIP, ensure basic financial needs like insurance and emergency funds are met.
  2. Immediate Cash Needs: If you foresee needing cash soon, it might not be the best time to prepay a home loan.
  3. Short-Term Solutions: For immediate financial goals, consider short-term savings like RD or SIP in mutual funds.
  4. The Allure of Being Debt-Free: Many aim to clear their home loans early to be debt-free, which can save on interest.
  5. Investment Potential: SIP in mutual funds offers a way to grow money over time, especially if committed long-term.
  6. Staying Committed: While investing can be lucrative, it requires discipline to avoid diverting funds to lifestyle expenses.
  7. Risk Considerations: Your risk tolerance can guide your choice. If you're risk-averse, prepaying a home loan might feel more secure than market-linked SIPs.
  8. Returns vs. Interest: Weigh the potential returns from SIP against the interest saved from prepaying a home loan.
  9. Expert Advice: Financial experts often provide insights tailored to individual needs, helping in making an informed decision.
  10. Long-Term Goals: Your long-term financial objectives will play a significant role in determining whether to prioritize home loan prepayment or SIP investments.

This is where tools like the home loan prepayment calculator and home loan vs sip calculator can be handy.

SIP vs. Home Loan: Why SIP Stands Out

Mutual funds, especially through SIPs, have become a favored choice for long-term wealth growth. While prepaying a home loan can feel like easing a financial burden, investing in mutual funds often offers more advantages:

  • Liquidity: SIPs provide flexibility. Investors can quickly access their money, especially in emergencies. In contrast, money used for home loan prepayment is locked away, making it hard to retrieve during urgent needs.
  • Higher Returns: Over time, SIPs, particularly in equity mutual funds, tend to yield better returns than many other investment avenues. Using extra funds to clear a home loan means missing out on these potential gains.
  • Tax Benefits: While home loan EMIs come with tax deductions, the combined benefits of mutual fund returns and their tax advantages often outweigh just prepaying a loan.

In essence, while both options have merits, SIPs offer liquidity, potential for higher returns, and tax benefits, making them a compelling choice for many. Using tools like the loan prepayment calculator can give you a clearer picture of your savings.

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FAQs about Home Loans and SIPs

Both have their benefits. While home loan prepayment reduces interest outflow, SIP in mutual funds offers potential higher returns. The choice depends on individual financial goals and circumstances.

Investing in SIP might be better as prepaying home loans can lead to loss of tax deductions. However, the decision should be based on individual financial situations.

EMI is for repaying loans, while SIP is for investing in mutual funds. The choice between paying off a loan or investing depends on one's financial goals, risk appetite, and personal preferences.

Clearing a loan reduces interest, but investing, especially in SIP, can offer potential higher returns. The decision should be based on individual circumstances.

Market volatility can impact returns, and there's no guarantee of profits. SIPs in equity funds expose investors to market risks, and returns can vary. Also, SIPs in underperforming funds can lead to lower returns. It's essential to review and choose the right funds.

While paying off a home loan reduces interest outflow, investing in SIP can offer potential higher returns. The choice depends on individual financial situations. 

Clearing a home loan is financially beneficial as it reduces interest outflow, especially during the initial stages when the interest component is highest.

Taking a home loan, especially when interest rates are low, can be financially beneficial. It allows individuals to purchase property without waiting to accumulate the entire amount, potentially benefiting from property appreciation. Additionally, home loans in India offer tax benefits on both principal repayment and interest paid.

Some opt for longer-tenure home loans with lower EMIs and invest the saved amount in equity funds for potential higher returns. The decision depends on individual financial goals.

Published on 3rd October 2023