How long should you take a home loan for?

Ankur KapurFinqa.inEveryone aspires to buy a home at some stage of their life. Lots of people believe that real estate prices will never go down. This is a myth as real estate prices also go down, but the decline is gradual instead of sharp swings. Therefore, the decision for buying your first house should not be based purely on emotions.A house, besides being a long-term asset, makes you eligible for significant tax breaks. You can claim deduction up to Rs 1.5 lakh for repayment of home loan principal under the overall limit of Section 80C of the Income Tax Act. Moreover, you can claim an additional deduction of up to Rs 1.5 lakh under Section 24B for interest payment once you get possession and occupy the house. If you take a joint loan with your spouse, then each of you can claim both these deductions individually, thus optimising your tax savings further.One of the key parameters defining your home purchase budget is how much do you currently have and how much you would have to borrow from bank in the form of a home loan. These days most of the houses/apartments in major metros will cost at least a crore if not more. In smaller towns this budget may place you very well in luxury segment. Irrespective of the category of the home buyer, a first time home purchase is usually a stretch on an individual's personal finances. On one side, you are likely to exhaust all your savings towards the downpayment and on the other side you will take a home loan for the balance, EMI's from will increase your monthly expenses. Therefore, you should run your own numbers realistically before committing to your for first home purchase.One of the factors,  most first-time home buyers are usually concerned with is the amount of loan. Usually 46 times of your annual take home is considered as the eligible home loan amount with maximum 80% of home purchase value. However, there are many other factors that can impact your home loan eligibility. It is best to check with your home loan provider for exact details.The other important factor is the amount of EMI towards home loan. Here are three scenarios if you plan to take a home loan of Rs 1.5 crore @ 10.5 % p.a.In the first scenario, your EMI for Rs 1.5 crores is Rs 1.37 lakhs compared to Rs 1.5 and Rs 1.66 lakhs. This is primarily on account of the tenure of the loan.So while your EMI maybe lower in Scenario 1, you will be paying off the loan over a much longer period of 30 years - Hence paying much more interest compared to Scenario's 2 and 3.

   So this brings us to the question, " Which scenario should you choose ? "In our view, if you have the funds, you should ideally pay off your loan as soon as possible and go with the least tenure. This will help you save on interest costs significantly. However, if you are an experienced investor and have confidence of generating return more than the interest cost (e.g. if your interest rate is 10% but you can generate a return of 12% from investing your money), you may select the longest tenure and invest the differential (1.50 lacs – 1.37 lacs = Rs 13,000) that will grow your portfolio much more than the extra interest expense. On a separate note, real estate prices have crashed in the last few months and now may be a good time to start evaluating various residential projects.