Planning to take a home loan? Consider these three factors to decide the tenure

(Photo: Datum House - SML Architects © Yadnyesh Joshi)

In an average Indian household, owning a house remains one of the most cherished dreams. While saving enough and buying with your own money is the right approach, limited funds can force you to finance the property. And since the loan amount is usually quite substantial, applying for the same entails a lot of decision making. Amongst the other important things, one has to decide the tenure of the loan – the right repayment period for yourself.

In India, the maximum tenure of the home loan depends on the type of property you’d like to purchase. A home loan tenure usually ranges from 5-30 years. Home buyers usually opt for longer tenures of 25 or 30 years instead of a shorter period to keep their EMIs lower. But is this parameter enough to decide on the tenure or are there other factors as well?

Nevertheless, both options have their pros and cons and are entirely based on an individual’s preferences. To help you understand better, here is the guide to know about your loan tenure and how it affects your overall payments.

Borrower’s age

The first and foremost factor to decide on the tenure is to make sure it is aligned with your age. If you are in your 30s or younger, then you can easily opt for a tenure of 25 to 30 years. As this is an age where you plan to settle down and start a family, so monthly expenses are at their peak. In such a scenario, opting for the maximum home loan tenure and lower EMIs can work in your favour. However, if you are financially stable and can handle large EMIs, it is always advisable to opt for a shorter tenure to help save on the interest payable.

For those in their 50s or nearing their retirement, it is always better to opt for a shorter tenure to avoid any rejections. This is because lenders look for borrowers who have a regular income and will pay back the loan easily rather than someone nearing his/her retirement.

Let’s understand this with the help of an example. At the age of 40 you take a home loan of Rs 80 lakh at an interest rate of 8.2 percent for 20 years. Once you are okay with the tenure and interest rate you will be able to pay off the loan, assuming that the interest rate will remain the same or reduces below 8.2 percent. However, any increase in the interest rate can affect the affordability and you might have to extend the loan tenure. Now, increased loan tenure is going beyond the span of your career and you may face trouble paying your home loan EMI after retirement, in absence of a regular income.

Also read: These banks and housing finance companies offer the cheapest home loans

Loan amount you seek

The total amount being borrowed has a huge influence on determining the home loan tenure. For instance, if your loan amount is significant, let’s say 6-8 times your monthly income, it’s better to opt for a long tenure as it will buy you more time to repay the loan. However, if the loan amount is just 2-3 times your monthly income, then you can easily opt for a shorter tenure, as choosing a longer tenure can increase the interest cost. Both the options are situation based, however, one thing that is important to keep in mind is to choose a tenure that won’t put a strain on your financials and keep your payouts at ease.

Total interest payable

Along with your credit score, the loan tenure selected by you directly affects your interest rate. The rate of interest is calculated annually, which means the total interest burden is more when the tenure is long. Generally, the rate of interest multiplied by the longer tenure heightens the cost of credit whereas shorter tenure attracts a lower credit cost. Therefore, it is advisable to go for shorter tenures to keep the interest cost low. For instance, if you are taking a home loan of Rs 80 lakh for 15 years at 8.2 percent, the total interest paid at the end of the term will be around Rs 60 lakh, while for a 25-year loan, it will be Rs 1.8 crore which is almost double the amount.

Another option is to lower your interest cost and still have lower EMIs is to initially choose a longer tenure and then pay off your debt (only if you can afford it) in full a few years before the completion.

How should you decide?

The most important thing to keep in mind while taking a home loan is to keep your monthly burden low. Let’s face it: home loan EMIs will take away a big chunk of your monthly income. Therefore, analyse your present and future income to define your ability to pay without any defaults. Your income is very crucial to even know that you can afford a home loan.

For some people, the priority might be to clear the debt and ease the burden enthusiastically. Therefore, a shorter tenure might be a good option for them. On the other hand, for some taking a loan with high EMIs might be a big risk, hence a long tenure might be the perfect solution for them.