How to choose your Home Loan Tenure wisely?8 min read
Buying a own home is among the most significant decisions of an individual’s life. All your life you work towards realizing the dream of having your own roof, saving bit by bit over the years. But depending on the city you live in and the neighborhood you want to be a part of, your savings might not suffice for making an outright purchase. But that does not mean that you give up on the dream of owning your home. You have the option to apply for a Home Loan.
What is a Home Loan?
Home Loan is a secured loan extended by financial institutions against your application for the same at Current Home Loan interest Rates. Home Loan can only be used to purchase a home and no other purpose. The said property acquired from the housing loan is mortgaged with the bank,and you need to repay your entire loan amount in EMIs (Equated Monthly Instalments) to be able to transfer the ownership back to you.
You can continue living in the house as long as you are repaying the EMIs on time. If you default in making the EMI payment, the lender could auction your property to recover the dues. Being a secured loan, the rate of interest against the HomeLoan is lower as compared to various other loans.
How to Choose the Right Tenure for a Home Loan?
When opting for a housing loan, you must consider various factors such as the amount of loan, interest rate, and repayment tenure. One of the most criticalfactors that requires careful consideration on your part is choosing the right tenure for a Home Loan. Tenure is the total duration for which you need to pay the EMIs; generally, for a Home Loan, the repayment tenure is around 15-20 years depending on the lender you choose
If you are unclear about what would be the right tenure for your housing finance, you should read further for clarity regarding the same.
Your age has a critical role to play in deciding the total tenure of the loan that you should be opting for. Banks usually favour young individuals with a stable income level as they have working age on their side, i.e., they have many years of working before retiring. When you are in your late twenties or early thirties, you can opt for a longer repayment tenure, which makes sure that the EMI is lower.
As your income level would be somewhat less and similarly if the EMI burden is also less, you can discharge it efficiently. Also, it is possible that due to changes in monetary policy of the Reserve Bank of India, the rate of interest against Home Loans can be changed, which might require increasing the number of EMIs. This process is easier if you are younger as compared to someone who is already in the late 50s.
If you feel that you are well settled in your job, then you can opt for a shorter tenure, though this would mean that your EMI burden is higher. Similarly, you need to pay the lesser amount as interest.
- Interest Variations
Even if your Home Loan is against a fixed rate of interest, it is also subject to change if there is a change in the base rate. In such a situation, if there is an increase in the interest rate, your interest burden would increase significantly.
As such you would need to restructure your loan and increase the number of EMIs. But your lender would be willing to increase the number of EMIs; only if you have age on your side,i.e., you must not be nearing the retirement age. Otherwise, you will have no other option but to increase the number of EMIs.
- EMI Repayment Capacity
The tenure of the loan is also decided on the basis of your repayment capacity. If you have a high-income level, then you can choose a lower repayment tenure as you will be able to afford the higher EMI amount. Whereas if your income level is low right now and would increase in the future, then you can opt for the highest possible tenure which offers you the flexibility of lower EMI amount right now. You can always restructure your loan at a later stage or if required can transfer the balance to another lender with the lower interest rate.
- Taxation Benefits
If you feel that the tax benefits that you would be able to derive from the interest payments against your Home Loan would be significant, then you can choose to go for a longer tenure.As in such a case you can claim a tax deduction for a longer period. But do remember that you would be paying more interest if the tenure of the loan is increased.
Taking a Home Loan to purchase your new home is a wise decision in the modern times when the real estate prices have reached newer levels. But you must consider all the factors mentioned above before deciding on the tenor of your loan so that you can derive maximum benefits from the Home Loan.
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