Buying a home is nothing less than a dream come true! However, regardless of how inspiring that achievement is, it comes with some strings attached, the most significant of which is the Home Loan you procure. After all, it is a substantial financial commitment that you have to abide by, for as many as 10-30 years. Given this simple fact, it becomes more than necessary for you to know and understand all the nuances pertaining to the duration of your loan home.
To make this task convenient for you, we have spelled it all out in a comprehensive and straightforward manner.
To begin with, let us understand how the repayment of loan works. Once the loan amount is disbursed, you are expected to repay the same, in the form of equated monthly instalments (EMIs). The amount per instalment comprises two elements – Principal and Interest.
In the early years of your repayment, the more substantial chunk of your EMI goes towards the principal amount, while the in the later years, the major part of the EMI is dedicated towards the payment of the interest on the loan. Hence, the faster you repay the loan, the lesser interest you will be required to pay.
Let us illustrate this with an example:
Consider you take a loan of 40 Lakhs, at an interest rate of 10% per annum. If you choose this loan for 20 years, you will be required to pay an EMI of 38, 601. In this case, by the end of your tenure, you will be spending approximately 2.64 Lakhs as the total amount of interest, on the actual principal of 40 Lakhs, implying, that you will be paying approximately 92.64 Lakhs in total.
If you take the same loan, for a span of 10 years, at the same interest rate, i.e., 10%, then you will be required to pay an EMI of 52,860. While the EMI is comparatively higher than the earlier case, you will only be spending approximately 23.43 Lakhs towards the interest. Thereby, the total cost of your loan will be approximately 63.43 Lakhs. This implies you will end up saving as much as around 29.21 Lakhs, on the loan, which by all means is an amount substantial enough to command your attention. Even if you go for a loan duration of 15 years, you can easily save up to 15.27 Lakhs! Now isn’t that truly astounding! Well, at least we think so.
Now that we have established the significance of Home Loan tenure for you let us move on to the aspects that you should be aware of, before locking your Home Loan duration. Of course, both short, as well as long tenure loans have their own set of pros and cons, and the one that you should pick is entirely dependent on your financial standing, your willingness to commit a hefty EMI, and your household income, amongst other factors.
If you are a first-time borrower, it is evident that you would be tempted to pay a higher EMI, in order to repay the loan at the earliest possible. While this will help you in reducing the overall interest outgo on the loan, it will also burden you with the strain of paying a hefty amount each month, consistently for at least 10-15 years. Hence, you should tread carefully, and opt for a Home Loan EMI that you can pay conveniently. This will help you strike the much-needed balance between your EMI and your day-to-day expenses.
The best way to chalk out an ideal EMI for you is to confine the instalment to a maximum of 30-40% of your total household income so that you can use the remaining 60-70% to meet other ongoing as well as immediate financial obligations. As a matter of fact, the bank will also gauge your credit limit, using the same rule. If after choosing your tenure, your EMI exceeds 50% of your income, the bank will most likely decline your application. You can use MyMoneyMantra’s Online Home Loan EMI Calculator, to check the ideal EMI amount for you. Accordingly, you should go ahead to choose a loan duration that fits the bill perfectly.
Simply put, you should choose an EMI low enough to not burden yourself with hefty pay-outs and high enough so that your tenure doesn’t get stretched any further than it needs to.
If you are in your 20s, 30s or early 40s, you can conveniently pick a longer loan duration lasting up to 20 or even 30 years, depending on your choice. However, if you are already in your 50s while taking the loan, it is highly recommended that you opt for a duration of 10 or a maximum of 15 years at max.
As must be known to you, Home Loan repayments will allow you to reap some tax benefits, such as those offered under Section 80C and Section 24. While it may be tempting to continue the repayment for a longer duration to enjoy the benefits, you should always weigh the benefits against the interest that you will end up paying over the period of time. You should then take the decision in favour of the alternative that will help you enjoy a better deal!
If your bank charges low or no prepayment penalty, you can opt for a longer tenure as it will prove to be more beneficial. The longer duration will ensure that when you have some extra funds that come in the form of bonuses, incentives, income tax returns, and so on. You can use them to make prepayments thus reducing your loan tenure. Moreover, if you can save a larger chunk of money, you can even pay off your loan in entirety, much before the stipulated tenure. This alternative will save you from the pressure of shelling out a huge amount of money towards the EMI on a consistent basis, while still giving you the much-desired freedom of paying off the loan, as and when you deem fit!
While there is no ‘one size fits all’ policy for Home Loan tenure, with a little understanding of the ideal loan amount for you, a befitting EMI, and your overall financial obligations can easily help you arrive at a decision about an optimal loan duration!
We hope that you now know all that there is to, before locking the home loan duration. So, wait no more before you take the first step towards moving into your safe haven, and apply for a Home Loan!
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