A home loan helps you fulfil the dream of owning your own home. However, applying for a home loan and getting it sanctioned is a long-drawn process involving several steps and formalities. The tenure of the home loan is one of the most crucial factors for you to consider.
That’s because the length of the home loan tenure has a direct impact on your cost of borrowing which, in turn, increases the cost of the property.
Home loan tenures usually range from 15 to 30 years. In many instances, homebuyers opt for a longer tenure instead of a shorter one. Both options have their pros and cons, and it depends entirely on individuals to determine the tenure that suits them.
Factors that determine the tenure of your home loan
Financial experts advise that you clear all other debts before applying for a home loan to improve your credit rating and eligibility. Here’s a look at some of the most important factors a borrower must consider when determining the ideal house loan tenure:
Current income: Take stock of your current income and expenditure and determine your monthly savings or net disposable income. According to financial experts, the home loan EMI should account for not more than 50% of your net take home salary.
Also, remember that there is an inverse relationship between the EMI and the tenure of the home loan. If you opt for a lower EMI, then the tenure of the home loan increases accordingly. You may opt for a 15 or 30-year loan tenure, depending entirely on your income. A longer tenure will reduce the EMI and you can continue to maintain your lifestyle.
However, many banks and lending institutions provide the flexibility of changing the home loan tenure. As and when your income and savings increase, you can prepay your loan and reduce its tenure.
Home loan rate of interest: Banks and housing finance companies generally offer a lower interest rate for home loans taken over a short term of 15 years. This is because lenders can predict interest rate variations in the short term. However, this becomes difficult for long tenure loans going up to 30 years and that’s why they come with a higher rate of interest.
You must assess if you have the financial resources and sufficient liquidity to repay a home loan over a shorter period of time. If that’s a reasonable option, then it makes sense to choose a short tenure and avail the benefits of lower… Click To TweetLife stage: Your financial responsibilities vary at every life stage and this is a significant factor to consider while choosing your home loan tenure.
If you are planning to settle down and start a family, your monthly expenses will increase accordingly. In such a scenario, it’s advisable to opt for a 30-year tenure and settle for a lower EMI.
The term of home loans usually ends around the age of retirement. But if you are only a few years from retirement, you can opt for a shorter loan tenure so that your loan is repaid by the time you retire.
Total housing loan amount: The total amount borrowed as a housing loan also plays an important role in deciding the tenure. If you have borrowed a significant amount, it’s better to opt for a long tenure instead of a shorter one. This will buy you more time to repay the loan and also decrease the size of the EMI.
Cost of borrowing: A 30-year home loan tenure may come with a smaller EMI but it is likely to increase the cost of borrowing. Banks and housing finance companies push for a longer home loan tenure, claiming that the EMI for a 30-year home loan is lower compared to a 15-year tenure.
However, the truth is that a longer home loan tenure is financially beneficial for lenders. While it’s a common perception that a lower EMI means a lower cost of borrowing and a lesser burden on the pocket, on the contrary, you pay more interest for a 30-year home loan compared to a 15-year one.
This increases the cost of your property, translating into a lower RoI.
The middle path
Assuming there is no prepayment penalty, you can enjoy the benefits of a 30-year tenure and work towards prepaying the loan in 15 years through part payment at regular intervals.
The part payment can be utilised to settle the principal amount and bring down the interest component of your EMI. Financial experts suggest that up to 75% of any upfront amount received, like an annual bonus or maturity amount of investment, should be spent to prepay your home loan.
By taking these small steps, you can reduce your liabilities and ensure that you are debt-free at the earliest.
Zeroing in on a tenure for your home loan is quite a challenge as you have to think through all the possible scenarios that you might have to face while repaying it. However, don’t unnecessarily stretch your finances to shorten the home loan tenure at the cost of your family’s needs and comforts.
Ultimately, it’s all about striking a fine balance between your monthly EMI commitments and the loan tenure.
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