The cost incurred on acquiring a home loan is more if the loan has been taken for a longer duration. If the duration is longer, then it may also intervene with your monetary objectives throughout as home loan tenure has a direct impact on the overall cost of the property. You must plan your home loan well as the home loan tenure is one of the most crucial or important decision making factors of the home loan.
There is no standard ideal duration and it should be considered based on your present financial conditions and your requirements. The banks and the HFC’s normally push the borrowers to take up home loans for a longer duration by stating that the EMI is comparatively lesser in value. They do so as it is more beneficial to them.
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Factors affecting home loan tenure
The various factors that affect home loan tenure are:
Home loan amount:
A longer home loan tenure is granted for loans with a higher loan amount to make it more eligible to the borrower. Nowadays banks are offering home loans for a tenure of 30 years at maximum whereas earlier the maximum tenure was 20 years. The private banks and the HFCs are normally lenient while they are fixing the home loan tenure.
Home Loan Interest Rates and EMI:
If all the other factors are constant and if the interest payable on the loan is less, then the home loan tenure will also be short. If the borrower also wishes to avail of the loan and pay less amount as EMI then the loan tenure will also be longer. The lower EMI is opted by the borrowers to avoid compromising on their current lifestyle. However from a personal finance perspective, this may not be beneficial as the longer the duration, the more is the amount that is required to be furnished as the home loan interest.
Age of the Borrower:
The age of the borrower is also another factor that helps in the determination of the home loan tenure. It is generally calculated by deducting your current age from 60 years (retirement age). If the home loan eligibility is not a concern, then this factor could be ignored.
Can we decrease home loan tenure?
A shorter home loan tenure means more amount to be paid as the Equated Monthly Installment (EMI). As already stated above, it is to be noted that shorter home loan tenures make the cost of availing the loan less. You may thus opt for a home loan with a lesser tenure based on your financial capacity and affordability as the EMI payable will be marginally higher even though you will be saving a huge amount that was otherwise required to be paid as interest.
For example, assume you are availing a home loan for a value of Rs. 50 Lakhs with an interest rate of 11% for 20 years. You may be required to pay Rs 51,609 as EMI for the same. If the interest rates fell by 0.25%, then the loan is payable at a rate of 10.75% with an EMI of Rs 50,671. Now if you can afford the payment of an amount which is slightly higher than your previous EMI, let’s say you can afford to pay Rs 52,429 as EMI, then you can bring down the loan tenure by two years and make a savings of Rs 8.58 lakh as interest cost.
It is a general perception that the debts should be paid off as possible. In cases wherein the interest amount is high, then it is recommended that you prepay the loans in parts to reduce your home loan tenure as longer the tenure higher is the cost of the loan. Thus it is recommended that you avail of a home loan with the tenure which is beneficial as well as affordable to you. Short tenure loans are highly recommended over lower EMI loans if you’re able to afford higher EMI every month as in the long run, it will be more beneficial.
Can we increase home loan tenure?
The banks as HFC normally convince the borrower of the property to opt for a home loan with a longer tenure. They promote the long tenure loans by asserting that the Equated Monthly Installment (EMI) is less on such loans. Even though the home loans with the longer tenure may cost you a higher amount, you can avoid the stress of missing an EMI payment which could affect your credit score. Reducing your home loan tenure also means that you are giving up on the tax deductions on your EMI.
From personal financing, it is recommended that the borrower should opt for the longer tenure home loans only in circumstances wherein he is not able to afford a higher EMI because when you opt for a home loan with longer tenure, you are required to make a higher amount as the cost of acquiring a loan in the long run. Thus it is recommended that you calculate the tenure and corresponding interest rate options before finalizing your home loan plan.
You change the tenure of your loan by visiting the branch of your bank with the loan statement showing the principal amount and the interest at which the repayment needs to be made. You are also required to show the outstanding balance of your loan. Reducing the EMI payable may include various paperwork and includes certain charges. After following all the required procedures, you will receive the fresh loan agreement letter showing the new tenure and the new rate at which the Equated Monthly Installment (EMI) is payable.
Is it better to have higher tenure or lower?
The ideal home loan tenure depends on the repayment capacity and your choices in closing your liability. If you want to close your liability faster you should go for a higher EMI with lower tenure in case your EMI doesn’t match your repayment capacity you should choose a lower EMI with higher tenure. To avoid financial shortages.
Summing up, home loan tenure is the duration in which the home loan is required to be repaid. The home loan duration may be long or short based on factors such as the loan amount, ability of the buyer to afford the EMI, the interest rate charged, and sometimes the age of the borrower. It is always recommended in the best interest of the borrower that they opt for short tenure loans and in the long run, lakhs of rupees could be saved as interest amount. However, on opting so, the amount payable as EMI will be higher. If the borrower is not able to afford such a high EMI, then he shall opt for the long tenure loans.