Home loans are long term and big-ticket liabilities. The main factors that determine the cost of the home loan are the rate of interest and the tenure of a home loan. While the bank decides the interest rates, you have the liberty to determine the tenure.
We understand that deciding the ideal tenure can be a bit tricky, especially with banks and NBFCs extending the tenure to 30 years. In this post, we discuss the advantages and disadvantages of longer loan tenure.
Advantages of a longer home loan tenure
Lower EMIs
EMIs and tenures are inversely proportional to each other. The most significant advantage of a longer home loan tenure is that your EMIs are smaller. This works well, especially for those who go in for a home loan at the start of their career and those with fixed and limited income.
Higher quantum of loan
As you get a longer tenure to repay the home loan, you can go in for a higher quantum of home loan, thereby making you eligible to buy a property with the best amenities at the right location. This is also helpful if you are applying for a loan based on a single income.
Income tax benefits for a longer period
Home loans come with tax benefits. It includes deduction under Section 80C for the repayment of principal and under Section 24 for the interest paid on loan. The longer your loan runs, the longer you would be able to avail income tax benefits.
Greater flexibility in repaying the loan
As the loan is spread over a longer tenure, you have more flexibility in repaying the loan. During the initial years of your career, lower EMIs suit your needs. Further, as and when your income increases, you can use it to increase your EMI or even prepay a chunk of your loan.
Disadvantages of a longer home loan tenure
Higher amount paid towards the loan
As the tenure of the loan is longer, you pay interest on the loan for a more extended period.
Consider a Rs 50 Lakh home loan is availed at 10.5% interest. If the tenure is at 20 years, the total amount repaid at the end of the period of the loan is Rs 1,19,80,559, and if the tenure is 30 years, the amount increases to Rs 1,64,65,307. Do you see a vast difference? While the difference in the EMI amount on the different tenures comes up to hardly Rs 4,000.
Going for longer tenure raises the cost of acquisition of a property. This matters if the property is bought solely for investment.
Becomes a liability in case of an emergency
Lower EMIs may suit you. However, in case of an unforeseen crisis like death, your next of kin will be left with a huge loan, which might prove a significant liability for them.
Might restrict your ability to avail other loans
Before approval of any loan, lenders pay attention to your existing loans. If you have a long tenure loan already being serviced, chances of approval on other loans may reduce.
All said and done; you must weigh both the sides of the coin before taking a final decision on the tenure of the home loan.
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