Selecting the bank, interest rate, and the loan repayment period are critical aspects while considering a home loan. The tenure is a vital part because the absolute cost of ownership depends on it. In plain words, the home loan tenure determines the total sum you have to shell out for owning the property.
Principal plus interest divided by the tenure make up your installments. A simple logic is, the interest and EMIs (Equated Monthly Instalments) are inversely proportional. You pay less interest and high EMIs if the tenure is shorter, versus more interest and low EMIs for a longer term.
How to decide what tenure is ideal for you? What factors do you need to consider? The aim is to close the loan at the earliest so you pay the least interest. Both early repayment and low interest sound good, but can your financial portfolio support the high EMIs?
This looks confusing, but deciding the tenure is pure mathematics. Here is a list of parameters to consider before choosing your home loan tenure.
Factor #1 – Age
Age is a prime part that determines the loan period. Banks offer longer tenure to young applicants as they have enough earning years ahead of them. Borrowers in their twenties can avail the longest tenure of twenty years, but those in their mid-forties cannot do so.
The reward of having age in favour is when interest rate goes up during the payment tenure. A younger person can extend the repayment span of the loan, an effect unavailable to people approaching retirement age.
When you are planning to take a home loan, try to have age on your side. Early age will give you adequate leverage over the loan. If you are in the twenties, and starting your career, settle for the longest tenure to keep the EMIs low. People in their thirties with a stable income can avail a shorter term as they can afford higher EMIs. Opting for a shorter tenure will help save the interest payable.
Factor #2 – Current and Future Income Analysis
Unless you got cash stashed in bank accounts, the only way to pay off your home loan is from your income. Bankers will analyze your income for any loan. Income becomes more crucial for housing finance as the commitment for a home loan extends for several years.
Your present and future income will define your ability to pay EMIs without defaults. A shorter term is always profitable if your income is high enough to support higher EMIs. If you do not have your foot on a solid ground, go for a longer tenure to lessen the EMI burden.
Though lower EMIs can be smooth sailing, you will end up paying more interest. In case of shorter tenure and higher EMIs, the interest payout will be lesser. This will reduce your total cost of ownership.
Factor #3 – Interest
The interest you pay is the cost of credit. The quantum of interest which is payable depends on the quantum of credit, the home loan tenure, and interest rate. The rate of interest multiplied by longer tenures heightens the cost of credit. Shorter tenures account for lower credit cost.
Comprehend that you have to pay the cost of finance until the end of loan repayment tenure. There are many online services which offer EMI calculators. Make use of an EMI calculator to compute the total cost of credit for ‘X’ years. ‘X’ refers to the tenure of your home loan.
Computation of the finance cost using an EMI calculator will give you a scenario of the interest payout for your home loan. Getting the correct picture will help you plan your expenses.
Factor #4 – Equated Monthly Installments
Find your comfort level. Do not overstretch yourself to close the home loan at an earlier date. Closing the loan within a short span will save the interest payable, but make your EMIs shoot. EMI should not exceed 40 percent of your net monthly income. Select an ideal tenure to be in a comfort zone.
Choose a tenure that optimizes your savings without straining your financial position. You should be able to pay your EMIs with ease. Failing to pay EMIs can get you in serious trouble. Not only you will have to vacate your house, you will get blacklisted by banks and financial institutions.
Be prudent to decide the home loan tenure. Make sure EMIs get credited to your home loan account before the due date. Pay EMIs from your income. Home loan installments should not eat out your savings. You should be able to manage EMIs with little effort.
Consult your banker if you face problems paying EMIs. Readjust the loan tenure to reduce the installment figure. Most banks and financial institutions allow such modifications. As discussed before, to extend your loan tenure, you will need age on your side.
You have a family to take care, so save for the future and for emergencies. Opt for a home loan tenure that does not hamper your financial or social goals. Home loan tenure should not torture you. It should not chain the best part of your life either.
You can make a win-win decision with the factors discussed above. Refer to them when deciding the home loan tenure. If you still have issues, talk to your banker or a financial expert. They can design the perfect home loan tenure according to your income portfolio.