While availing the facility of a Home Loan, there are several factors which you must pay attention to. Rate of interest, the maximum amount available, penal charges, foreclosure conditions, availability of a Top-Up loan are some of the crucial aspects that warrant your consideration. But one of the most important aspects that has a significant bearing on your financial future is your Home Loan tenure. The loan duration, also known as repayment tenor, is the time period over which you repay the loan amount as well as interest component in the form of EMIs.
Depending on the financial institution you have chosen, the maximum and minimum repayment tenor can vary substantially. For instance, Bank of Baroda Home Loan comes with repayment tenor ranging between 5 years to 30 years. While some borrowers prefer to repay the loan as soon as possible and opt for a short tenure, there are others who want a lesser EMI liability and prefer opting for a long repayment tenure.
While the decision to choose the loan tenure seems straightforward, it is not that simple. There are various aspects to this decision which must be considered carefully before applying for a Home Loan.
Here is a comparative analysis of long term and short term tenure for Home Loan.
Interest rate applicable against your Home Loan is a significant factor and can substantially affect the final decision. For short-term Home Loans, the interest rates are lower as compared to the long term Home Loans. The reason is that in the short run, the lender can estimate the possible movements in the interest rate more accurately as compared to the long run. As the repayment tenor for Home Loans can extend to 30 years, the movements in the interest rate are difficult to predict. As a result, to cover for the risk involved, lenders charge higher interest rates for long-term Home Loans. Likewise, you can save on interest rate by making your spouse a primary applicant for the loan. All leading banks like HDFC Home Loan offer a lower rate of interest for women applicants.
The major implication of your Home Loan tenure will be on the interest cost that you will bear. It will take just a few simple calculations for you to analyse that longer the repayment tenure, higher is the total interest cost as an interest rate is applicable for a longer duration. Similarly, shorter is the repayment tenure; lesser is the interest cost because you pay interest for a smaller duration. So, before making out a decision consider the cost of the loan for the entire tenor.
Another crucial factor that will have an impact on your final decision is the amount of EMI that you can afford. As Home Loans are repaid in instalments, you need to opt for an EMI that you are comfortable with. When it comes to short-term Home Loans, you will be expected to pay significantly higher amounts as compared to long-term loans, which offer you lower EMIs to be served. However, longer repayment tenure entails higher interest cost and thus adds more burden on your shoulders. You would also take longer period to become debt-free. So, you must strive to strike a fine balance here, and opt for a repayment tenure which is as short as possible, subject to the EMI amount you can afford every month.
As Home Loan is a secured offering, your property will be mortgaged with the lender till you repay the Home Loan amount in full. Thus, longer is the repayment tenure, longer the property will be mortgaged with the bank. Similarly, shorter is the repayment tenure; quickly, you will be debt-free and enjoy a peace of mind. Moreover, you can seek additional funds against your home in the form of a loan against property, if there ever is a need.
If you are purchasing the property for the purpose of investment and would like to liquidate it as soon as you find a good deal, you must opt for a short-term Home Loan. This will save you from the foreclosure charges, which will be applicable when you close the loan account. Similarly, if you are purchasing the property for self-use, you can opt for a longer repayment tenure, as lower EMIs reduce the risk of default in payment. You can comfortably continue to live in the property while making the repayments.
From the above analysis, it is evident that the decision whether to opt for a short-term or long-term Home Loan depends entirely on your repayment capacity. Besides, you must also factor in a short term liquid fund for unforeseen expenses. If your finances allow, you must opt for a shorter tenure, as short as possible! For it will allow you to save on the interest cost and will make you debt-free sooner.
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