S Sridharan
Buying a home is one of the biggest investment in most individual’s life. Almost always, a home is bought with a loan taken from a financial institution. Thus, one of the biggest burden on individuals most often is repaying a home loan and the interest on the loan taken. Is there a way to write off the interest on home loan? It is! Let me explain how it is possible.
If the loan tenure is more than 15 years, the overall interest & principal paid to the lender is more than double that of the loan amount.
For example, the below table explains, the home loan taken for an amount of Rs.25 Lakhs for a period of 20 years with an interest of 8% per annum.
The Key points to be noted
The interest amount is pre-calculated and taken upfront. This means during the initial 10 years more than 70% of the interest are being debited from the client. So preclosing or paying more on premiums after a period of 10 years will certainly not going to benefit the clients.
Depreciation on the property price. If one has bought a flat or an apartment, the property value is going to depreciate after a certain period of time. On individual house though land value increases while property price falls down
The best possible solution to write of your home loan interest is to build a corpus simultaneously that generates a higher corpus with better returns. We recommend the individual to start an SIP in any equity mutual fund. A monthly SIP of a small amount could help generate returns that can completely wipe off the interest amount.
How is it possible?
If the investment is made in any equity-oriented funds which generate an average post-tax return of 12% it will help them to build a corpus of 25 Lakhs. This is the interest amount paid by the customer for the entire 20 years for Rs 25 lakhs housing loan taken.
Instead of increasing an EMI amount to pay off the housing loan quickly, the same amount can be parked in any equity mutual fund in an SIP mode to accumulate a corpus. Additionally, at the end of the EMI period, you have a house to live and a portion of a retirement corpus also ready to have a peaceful retirement.
Example
An individual at the age 38 has taken a housing loan of Rs 25 lakhs with an EMI of Rs 21,000. He or she simultaneously starts an SIP of Rs 2500 in any equity mutual fund. Assuming the SIP amounts to CAGR post-tax return of 12%, it will accumulate a corpus of 25 lakhs after 20 years.
At 58, the accumulated corpus of Rs 25 lakhs can be parked in an FD or any debt mutual fund which generates an average return of 7-8%, with monthly payout of Rs 16,600 interest income. This amount can be utilized for house hold expenses which may creep in at the time of retirement.
An early start of an SIP will help a customer to write –off his entire housing loan interest as well accumulate a corpus which supports his retirement too.
(The writer is Head, Financial Planning, Wealth Ladder Investment Advisors)
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