Bajaj Housing Finance extends home loan tenor to 40 years: Should you opt for a home loan with longer tenor?

Bajaj Housing Finance has revised the tenor capping subject to the applicant’s age at the time of the home loan application. The eligibility criterion for age is 23 to 75 years – with 75 years as the upper limit for age at the time of loan maturity.

Also read | Increase home loan EMIs or tenure: What should borrowers do?

Impact of higher loan tenors on borrowers

"A higher tenor means borrowers can borrow a larger loan amount without impacting their fixed obligation to the income ratio (FOIR)," says Adhil Shetty, Chief Executive Officer (CEO), BankBazaar.com. FOIR is a metric used by banks and other financial institutions to assess an individual's loan eligibility. In simple words, your bank assesses the disposable income that can be used to repay existing and new debts. Many banks also assess your other existing loan obligations.

The increase in loan tenor to 40 years brings down the EMI and increases affordability. For instance, at an 8.5 percent interest rate, the EMI per lakh for a 40-year loan is almost 5 percent lower than the EMI per lakh for a 30-year loan (refer to graphic).

There is a catch, though. "Higher loan tenors increase the interest burden significantly," says Dev Ashish, a SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor. For instance, a Rs 50 lakh loan at 8.5 percent (assumed constant) for 30 years has a monthly EMI of Rs 38,446 and total interest costs of Rs 88.4 lakh. But the same loan amount (and rate) with a 40-year loan tenor reduces the monthly EMI slightly to Rs 36,655 – a reduction of about 5 percent or Rs 1,800 per month. But the interest cost balloons to Rs 1.26 crore, which is Rs 71.8 lakh or 133 percent more interest burden than a 20-year loan (refer to graphic).

Longer loan tenor could impact your retirement years

Moreover, a longer tenor means that you may end up repaying your loan well into your retirement years. Shetty explains with an example. If you take a loan in your late 20s or early 30s, which data shows is the typical age when people invest in their own homes, you may very well be repaying that loan in your 70s. This can be risky, as your retirement fund would have to support your living expenses and your home loan EMI for over a decade after you retire.

"Assuming you don’t prepay, then you have a home loan hanging for your full working life," says Ashish.

Also read: Part-prepayment, higher EMI to keep your home loan interest outgo in check

What’s the best loan tenor?

Look at your age. Then, make sure your loan is aligned with it. If you are in your late 20s or 30s, then you can easily opt for a tenor of 30 to 40 years. "This is an age when you plan to get married and start a family, so monthly expenses are at their peak. In such a scenario, opting for the maximum home loan tenor and lower EMIs can work in your favour," says Atul Monga, Co-founder and CEO of Basic Home Loan.

"If you are financially stable and can afford a slightly higher EMI, it is better to take a home loan with a shorter tenor to save on interest payable," says Ashish.

The total amount being borrowed has a huge influence on determining the home loan tenor. Monga explains with an example. If your loan amount is significant, let’s say, six to eight times your annual income, it’s better to opt for a longer tenor as it will buy you more time to repay the loan. However, if the loan amount is just two to three times your annual income, then you should opt for a shorter tenor, as choosing a longer tenor can increase the interest cost.

Also read: Want low home loan interest rates? A good credit score helps

Moneycontrol recommends

Whether your loan tenor is long or short, never miss an opportunity to pre-pay your loan every time you get a bonus income or an increment. The sooner you become debt-free, the better it is.