Home Loans are usually disbursed with an average tenure of twenty years for all salaried employees. Anyone who is willing to take a home loan is never in favour of availing the longest tenure. This is pure because no one appreciates having an obligation for a tenure higher than five years.
The lenders are willing to offer a shorter tenure to borrowers who have the eligibility. The question that arises here is – Is it beneficial to have longer or shorter tenure.
The customers are always willing to avail themselves of the higher loan amount but smaller loan tenure. This is only possible if the applicant has higher income eligibility and looking for a lesser value of the loan.
Let us understand this with the help of an illustration
Mr. Sahil, getting a gross monthly income of ₹50 thousand is looking for a home loan. His age is 30 years and he currently does not have any obligations to repay. Sahil is eligible to avail a tenure of 20 years by any lender. He is easily eligible for a loan amount of ₹32 lac in 20 years. Though the loan he is looking for is only ₹20 lac. Sahil’s monthly expenses and savings amount to nearly ₹25000.
Sahil is willing to opt for a shorter tenure. He wishes to avail a tenure for only 10 years. His EMI would amount to ₹23,222. With the current expenses and saving structure he has, he is willing to spend 50% of his income as an EMI. He does not wish to increase his savings structure right now. He wishes to make regular payments in EMI and close the loan as per the issued amortisation. The total interest customer pays in ten years of tenure will be ₹7,86,604
Sahil opts for the tenure he is eligible for that is 20 years. His EMI amounts to ₹15506. He has more than 10% of the salary unused which he plans to invest further leading to an increase in wealth creation for him. Sahil prefers to keep his current liquidity high and make partial payments to reduce the tenure. However, he is not willing to keep his monthly expenses tight. The total Expected interest outflow in 20 years will be ₹17,21,435
|Details||Scenario 1||Scenario 2|
|Total Expected Tenure||10 Years||20 Years|
|Additional Investment made for 10 Years||-||₹8000 per month|
|Corpus After 10 Years||-||₹19,94,339|
In Scenario 2, after 10 years of regular EMI Payment, the customer will have an outstanding loan amount of ₹13,35,473. He has till now paid an interest of ₹11,96,193. With Regular Investments, he has already created a corpus of ₹19,94,339. (Assumption – In scenario 2, he makes an investment of money towards mutual funds yielding him an average return of 14% in 10 years)
This corpus he created is higher than the loan outstanding amount. The total interest he paid is ₹4 lac higher than scenario 1 however he ended up earning ₹6 lac additional amount.
As per the survey’s done, an average home loan in India gets closed in 8-10 years. Opting for Scenario 1 or Scenario 2 is on the customer’s outlook. In Scenario 1, Sahil is unable to make any extra expense or saving in the coming months since his EMI plus Expenses are completely eating his salary. On the other hand, in scenario 2, Sahil has the leisure of nearly 10% of his salary which he wisely invests in and using for leisure expenses.
If the investments are made smartly, they can yield a return that is higher than the home loan rate of interest. In such cases, the wealth gets created for the borrower despite paying the interest for a longer tenure.