Possessing a home remains one of the most cherished fantasies of the average Indian household. While saving enough money and purchasing the home with your own money is the best course of action, restricted cash may compel you to finance the purchase. And, because the loan amount is typically rather large, applying for one includes a great deal of decision-making. Among other things, one must decide on the loan’s tenure – the appropriate repayment period for oneself.
The maximum tenure of a home loan in India varies according to the sort of property you wish to acquire. The typical term of a home loan is between five and thirty years. To keep their EMIs low, home purchasers typically opt for lengthier tenures of 25 or 30 years rather than a shorter time. However, is this metric sufficient to determine tenure, or are additional criteria involved?
Nonetheless, both choices have a number of advantages and disadvantages and are largely dependent on an individual’s tastes. To assist you in understanding your loan duration and how it affects your overall payments, here is a guide.
The loan amount you’re seeking
The total amount borrowed has a significant impact on the length of the house loan. For example, if the loan amount is considerable, say 5-7 times your monthly salary, it is advisable to choose for a longer duration, since this would provide you additional time to repay the debt. However, if the loan amount is less than 2-3 times your monthly income, you can simply select for a shorter term, as a longer term will result in a higher interest rate. Both possibilities are situational, but one thing to keep in mind is to choose a tenure that will not strain your financials and will make your payouts predictable.
Age of the borrower
The most critical criterion in determining the tenure is to ensure that it corresponds to your age. If you are yound- earning well, and wish to take the burdern of home loan early in your life, there is nothing like it. You will be building an asset, instead of partying around. If you are in your late 30s or early 40s, you can easily choose for a 25+ year tenure. Monthly expenses are at an all-time high because this is the age when you intend to settle down and establish a family. In this case, opting for a longer loan term and cheaper EMIs may benefit you. However, if you are financially solid and capable of paying hefty EMIs, it is usually prudent to choose for a shorter tenure in order to save on interest. For individuals in their fifties or approaching retirement, it is always preferable to opt for a shorter term in order to prevent rejection. This is because lenders prefer borrowers with a steady salary who will easily repay the loan, rather than those nearing retirement.
To illustrate this with an example. At the age of 45, you take out a home loan of Rs 60 lakh for a term of 20 years at an interest rate of 7 percent(rates in early 2022). Once you’re satisfied with the loan’s term and interest rate, you’ll be able to repay it, assuming the interest rate remains constant or decreases below 7 percent. However, any increase in the interest rate may impact affordability, necessitating the extension of the loan term. Now that loan tenure has expanded beyond the duration of your job, you may have difficulty paying your home loan EMI after retirement, if you do not have a continuous source of income.
Total amount of interest payable
Along with your credit score, the loan duration you choose has a direct impact on your interest rate. Interest is calculated on an annual basis, which means that when the tenure is long, the overall interest load is greater. In general, the higher the rate of interest multiplied by the longer the term, the higher the cost of credit, whereas the shorter the tenure, the lower the cost of credit. As a result, it is prudent to opt for shorter tenures in order to keep interest costs low. For example, if you take a home loan of Rs 60 lakh for 20 years at an interest rate of 7 percent, the total interest paid at the end of the period will be roughly Rs 52 lakh, however for a 30-year loan, the total interest paid will be nearly 50% more that amount at Rs 84 Lakh..
Another way to reduce your interest expense while maintaining lower EMIs is to initially choose a longer duration and then pay off your debt in full a few years before completion (only if you can afford it).
Conclusion
The most critical consideration when taking out a home loan is to keep your monthly payment low. Home loan EMIs will consume a sizable portion of your monthly earnings. As a result, analyse your current and projected income to determine your ability to pay without defaulting. Your salary is critical in determining whether you can afford a home loan. Depending on your financial risk capability, your home loan strategy will change – For some, the priority may be to pay off debt and alleviate burdens cheerfully. As a result, a shorter tenure may be a better fit for them. On the other hand, for some, getting a loan with high EMIs may be a significant risk, and hence a long tenure may be the optimal alternative.
Bhoi Smrutirekha Dharanidhar