Millennials chase many dreams, and one of the major ones is to own a beautiful home. Each one’s view of the perfect home differs. One might love to have a home with an amazing view; smart interior lighting and the other might prefer a home where panoramic views of the water provide a much-needed relaxation.
Though every person’s definition of dream home differs, everybody in common wants to own a place and takes pride of home ownership. For a salaried person, it is quite difficult to buy a house worth ₹80-90 lakh. He/she will prefer to go for home loan and their major portion of salary will go towards the equated monthly installment (EMI).
If millennials plan properly, they can buy their dream home and also be debt-free in just a few years.
According to research-based management consulting, TechSci Research, on account of increasing urbanisation and affordable mortgage rates, India’s home loan market is anticipated to grow at a rate of around 22% during 2021 – 2026.
Also due to the government’s affordable housing scheme, the home loan market is expected to grow more in the coming years.
India’s home loan market can be divided into salaried and self-employed. TechSci Research report says, “Salaried segment accounted for around 88% market share in 2020. Major demand for home loans comes from the salaried segment as they have limited spending capacity. By tenure, the market is segmented into up to 5 years, 6-10 years, 11-24 years, and 25-30 years. About 11-24 years segment accounts for the highest market share as the most preferred home loan tenure among consumers in India is 20 years.”
This shows that the salaried segment is keen to purchase a home. Mutual funds can be used to pay the margin requirement needed to buy a home, say experts.
“However, this is best done by starting early with a 7-year time frame at least. If an investor wants to buy a house in 2-3 years, then his/her ability to take risks in mutual funds will be low and they would have to restrict themselves to low-risk debt funds. Therefore, they cannot generate a higher corpus. For this reason, mutual funds can be used for a home-buying goal if you start early,” says Vidya Bala, Co-founder, Primeinvestor.in.
Since the majority of home loan buyers prefer 11-24 years tenure, they can consider investing in mutual funds to close their home loan earlier. Also, experts say that one can start parallel SIPs along with EMIs so that they can start accumulating money for either pre-payment or part payment of their ongoing home loan. If they do so, the person’s overall loan term will reduce.
For instance, if Mr A pays ₹30,000 EMI per month for 15 years, and his interest rate is 9%, and if he chose to pre-pay a certain amount, the total number of years will reduce accordingly. In this case, SIPs help him reduce the total loan term.
Starting an SIP, a better option
Investment advisors suggest that one can start a Systematic Investment Plan (SIP) that can help you pay the down payment or a partial prepayment of the loan after a few years.
G Hariharan, who works in a crane manufacturing company says, “SIP is of great help since I can start one with even ₹500. I started off with ₹500 a couple of years ago and now I have increased the amount to ₹2,000 a month. It gives me flexibility and I look forward for long-term growth. I have plans to use the amount to prepay my loan amount.”
One can also stop or close the SIP and it offers a fair amount of liquidity. If you want to continue it again you can do so, as it is flexible, an easy and convenient investment.
Not just for down payment, one can also invest in a mutual fund either in lumpsum or start an SIP to help buy the dream home. For instance, if one starts an SIP as soon as he/she enters the workforce, it helps them give a huge return after a decade or so and that money can be used in purchasing your dream home.
“It is risky to use a single fund to build a portfolio. For the said goal assuming a 9% return on an asset allocation of 70:30, an investor would need about ₹15,000 a month to reach just the margin money (assuming 20% of ₹1 crore). Rest of course has to be through a loan,” says Vidya Bala.
She explains, “Saving to buy a house without a loan will need several years and higher savings. The portfolio can be made up of simple index funds from Nifty 50, and Nifty 500 and debt funds from the short duration and corporate bond category.”
Financial experts say that borrowers can try to recover the interest that they pay over the loan term by starting a monthly SIP. For instance, if your principal amount is ₹30,00,000, one can start an SIP with just 0.15% of your loan principal. This will come to ₹4,500. The tenure of your SIP can be your loan tenure. Even if one assumes a modest return in equity SIPs and at the end of 20 years, due to capital appreciation on your investment you could easily offset the interest on the home loan. Thus, one can make up for the interest component of home loans by SIPs, say experts.
Purchasing a home is an investment and millennials should choose to invest in mutual funds, as it helps them in the long run either to buy or repay the loan amount.
1) If the goal is to purchase your dream apartment, start an SIP now. If you start early, your returns will be huge in the long run.
2) Since property prices are climbing north, instead of postponing the purchase, investors can think of ways to accumulate returns by investing in mutual funds.
3) Investors need to ignore short-term fluctuations in the market, as the goal is set, one has to wait patiently keeping in mind the long-term results.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund