Hope all you excited to know about interest free home loan. are you?
In recent years, owning a home has become a distant dream for many due to the high cost of property and the rising interest rates of home loans.
However, there is a way to achieve this goal without breaking the bank. It is called an interest-free home loan using mutual fund SIP.
First, let us understand the basics of mutual funds and SIP.
A mutual fund is a professionally managed investment fund that pools money from investors to purchase securities like stocks, bonds, and other assets.
A Systematic Investment Plan (SIP) is a way to invest in mutual funds by contributing a fixed amount of money regularly over a specific period.
How can be used to create an interest-free home loan?
Suppose you are planning to buy a house worth Rs. 50 lakhs.
Traditionally, you would approach a bank for a home loan, which would charge you an interest rate of 8-10% per annum.
The total repayment amount around Rs. 1.20crore over 25 years.
Instead, you can use the following approach to create an interest-free home loan using mutual fund SIPs:
Step 1: Start investing in mutual fund SIPs
Start investing in mutual fund SIPs with a long-term horizon of at least 25 years which is equal to your loan tenure.
Choose mutual funds that have a history of consistent returns and invest in them regularly.
Ideally, you should invest in a mix of equity and debt mutual funds to balance the risk and return.
Step 2: Calculate the amount needed to create an interest free home loan
Once you have started investing, calculate the amount needed to create an interest free home loan.
In our example, you need Rs. 50 lakhs to buy a house. Assuming a return of 8.5% per annum.
You would need to invest Rs. 4400 per month for 25 years to accumulate Rs.1.20 crore.
Step 3: Use the mutual fund corpus to offset your borrowing goal
After 25 years, you would have accumulated Rs. 1.20 crore through mutual fund SIPs.
You can use this corpus to offset your principle and interest for home loan.
By doing so, you have effectively created an interest free home loan, as you are able to offset your interest and principle.
Advantages
One of the significant advantages of this approach is that you are not burdened with a home loan EMI for 25 years, which frees up your cash flow and allows you to invest in other avenues.
Moreover, as you have invested in mutual funds for a long period, you have also benefited from the power of compounding, which has multiplied your initial investment manifold.
Conclusion
An interest free home loan using mutual fund SIPs is a smart way to take borrow money for home without incurring any addition burden.
However, this approach requires long-term planning and disciplined investing.
If you are willing to invest regularly for a considerable period, you can create a sizable corpus that can help you achieve your your goals.