- An optimized home loan tenure keeps EMI manageable and reduces interest obligations
- But how will you choose an optimized tenure? This post will guide you to do so, so read and choose!
Lenders provide a long duration to borrowers to repay their respective home loans and help many buy their dream home by doing so. Talking about the duration, it can be a maximum of 30 years. With such a duration, the monthly obligations i.e. Equated Monthly Installments (EMIs) get substantially lower and fit in your budget. A lot many go that way but realize their mistakes by checking the loan statement showing tons of interest paid from their pocket year after year. And there are some who take the home loan for a very short tenure under the assumption of a solid rise in their income year after year. Some who get it make merry by reducing their interest obligations even as the EMI remains higher. But those who don’t get the rise as expected find it hard to service the EMI obligations on time. And that’s why the cases of late payments and defaults rise and go on to dent the credit profile of such applicants. The obvious result is a poor credit score, dampening their future credit aspirations. So, choosing the tenure is as important as choosing the interest rate. But how do you know which is the best home loan tenure for you? This post will tell you the same. Let’s read and plan your home loan tenure better.
Things You Should Consider to Choose the Best Home Loan Tenure
Current Income & Expenses – The decision of choosing the tenure mainly rests on what you earn and spend today. Needless to say, your spending should minus the rent you may be paying while planning a home loan tenure. A lot of us keep the ratio of EMI to NMI to around 40% just to lower the monthly obligations. This will most likely increase your loan tenure and raise the interest obligations. But if your finances are such that you can easily afford an increased EMI/NMI ratio to 50%, do choose that to reduce your interest obligations.
Property – Everybody wants to buy a dream home. But if it comes at the expense of compromising a way too much on your needs, then that dream becomes more of a burden than a thing to savour. Some will feel the burden month after month, while others will feel it much later when they see the massive interest they end up paying to the lender. So, the selection of the property should be such that you can pay the EMI easily while also keeping a lid on the overall interest outgo. So, if you find a property that can meet your needs at a much lower cost, you should choose that. This will further allow you to go for a relatively shorter tenure, helping you pay the EMIs without any problem and reduce your interest obligations over time.
Bulk Savings – Home loans are not financed fully to the cost of the property. They are financed at about 75%-90% of the property cost and you need to pay the remaining 10%-25% to the seller as a down payment. Check the table below to know the loan to value ratio as per the RBI guidelines.
|Loan Amount||Loan to Value Ratio||Property Value|
|Upto 30 Lakh||90%||33.33 Lakh|
|Above 30 Lakh-75 Lakh||80%||Above 33.33 Lakh-93.75 Lakh|
|Above 75 Lakh||75%||Above 93.75 Lakh|
So, if the value of the property is INR 50 lakh, the maximum loan you could get is INR 40 Lakh. In that case, the down payment comes as INR 10 Lakh. But if your savings allow you to pay INR 15 lakh upfront, do so as the loan liability will reduce to INR 35 Lakh with the same. This could allow you to go for a tenure of 15 years instead of 20 years you were thinking earlier. As per the current scenario, you can get the loan of INR 35 Lakh at an interest rate of 7.80% per annum. Let’s see how much you can save by choosing a tenure of 15 years.
|Repayment Tenure||Estimated EMI (In INR)||Estimated Interest Outgo (In INR)|
See, with an increased EMI of just INR 4,204 by choosing a shorter tenure of 15 years, you can reduce your interest obligations by a massive INR 9,73,808. So, if you have a net monthly income of INR 60,000, you can be allowed a tenure of 15 years as the EMI of INR 33,045 will be within 60% of your net earnings. Don’t hesitate, choose 15 years and save such a massive amount for use in other meaningful purposes.
Retirement – Retirement is all but a reality. Needless to say that you won’t have active income during your retirement days. So, the tenure should be such that you have some time (preferably 5-7 years) left before retirement begins. This will help you save more and live your retirement days comfortably.
You can see the benefits of an optimized home loan tenure. However, if you fail to choose an optimized tenure while applying for the loan, you still have a chance to correct it later on. Yes, you can pay an extra EMI every year. This will ensure the loan payment quicker than expected. Or you can request the lender to increase the EMI when your income goes substantially higher.