When you take out a home loan, you must understand that it is a big financial commitment and perhaps the most important financial decision you may make in your life. So, it is paramount that you understand the terms and conditions and every aspect of the loan in detail.
You must be aware of critical factors like the interest rate, type of interest rate levied by the lender, the EMI (equated monthly instalment) amount, loan tenure, etc. Being aware of these things can help you taken an informed borrowing decision, and you can plan your finances accordingly.
Home loan tenure is a critical factor as it has a direct impact on EMI and affordability. If you are not sure what home loan tenure is and how to choose the right home loan tenure, this guide is just for you.
What is home loan tenure and why is it important?
In simple words, home loan tenure is basically the amount of time you think you may need to fully repay the amount you borrowed. In other words, the home loan tenure is the stretched-out period through which you must repay the home loan in the form of monthly EMIs.
Generally, the home loan tenure can range from more than one year to a maximum of 30 years. As a home loan borrower, you must choose the right the loan tenure carefully as it has a direct impact on the home loan interest rate.
If you are a first-time home loan borrower, and not sure how to choose the right tenure, you can use the home loan EMI calculator to your advantage. It is an easy-to-use tool that allows you to know the exact EMI amount you must pay for the loan. All you have to do is input certain critical details like the loan amount, interest rate levied by the lender and the tenure.
So, you can adjust the tenure multiple times and finally choose a tenure where the EMI is affordable, and you can easily repay the amount without compromising on your other important monthly expenses. Generally, financial experts suggest that if you are young and far from retirement age, you can choose a long-term home loan. Whereas, if you are in your late 40s or early 50s and nearing retirement age, it is better to choose a shorter tenure.
Home loan with longer tenure
The long-term home loan may range from 20 to 30 years. When you choose a longer tenure, the EMI amount you may pay every month is lower and more affordable than for a home loan with a shorter tenure.
By choosing a longer tenure for a home loan, you can repay the interest and the principal amount in a more structured manner without compromising on your other monthly expenses. Also, a longer home loan repayment duration is more cost-effective.
On the flip side, in the longer tenure home loan, the interest rate is high, and the overall interest you pay over a period is high, which increases the overall borrowing cost.
Home loan with shorter tenure
As the term itself says, a short-term home loan is a short-term credit, and the repayment period ranges between 10 and 15 years. If you have the financial capacity and can repay the home loan within a short period, then you can opt for a home loan with a shorter tenure.
The EMI for a short-term home loan could be higher than a long-term home loan, but the overall interest you pay to the lender will be much less. Also, when you choose a shorter tenure for home loan repayment, the loan will end quickly, and you can be debt-free sooner.
Factors that affect home loan tenure
Age
When you apply for a home loan, the lender will consider your age as one of the critical factors in determining the interest rate. Also, as a borrower, you must be wary of your age when choosing the loan repayment duration.
If you are young and have just started working, you can afford to choose a longer repayment tenure. This is because you will have the benefit of a stable income, which will only increase over the years as you progress in your career. Once your income increases, you can try to pay off the loan faster before the actual tenure.
In contrast, if you are nearing your retirement age, opting for a shorter tenure is best advised. When you retire, you may not have a regular income stream and struggle with repaying the EMIs.
Loan amount
The higher the loan amount you borrow, the longer it may take for you to fully repay the loan. So, if you are planning to apply for a home loan of more than Rs. 1 crore, it is better to choose a tenure of more than 20 years as per your repayment capacity. This will help you easily afford the high EMIs, and make the payments more manageable.
Income
If you have more than one income source, you can afford to take out a higher loan amount and choose a shorter loan tenure. You can use the funds to pay off the loan faster and become debt-free.
Final Word
A home loan tenure is a critical aspect of a home loan. If you have the financial means, you can opt for a shorter tenure and repay the loan as soon as possible. But if you are on a tight budget with limited income and financial means, you can choose a longer home loan of up to 30 years. This will ensure that the EMI is affordable and that you can comfortably manage the repayment over the years.
