Factors affecting home loan tenureMarch 25, 2022 . Home Buyer's Guide . 10 min read
Your home loan tenure is the total repayment period of your home loan. If you will be paying your entire home loan of Rs. 40 lakh in 25 years, your home loan tenure is 25 years.
What EMI are you comfortable paying? How much money can you afford every month to pay the installment of the home loan you have taken without getting into a crunch? Your EMI depends on your tenure. What home loan tenure you choose to pay back your home loan keeps your EMI manageable and, in many instances, also reduces your overall interest rate.
A tenure makes it easier for you to take a home loan
The entire purpose of tenure is to enable you to repay your home loan along with interest as conveniently as possible. Whether you desire to repay your home loan in 20 years, 25 years, or 30 years, depends on how much EMI you want to pay, how much interest you are comfortable paying, and how many earning years you have got with you.
Please remember that it is a big responsibility – paying back your loan – for many years. You will be consistently paying your EMIs, month after month, for many years. Hence, you need to borrow wisely, and you need to be careful about the tenure that you choose. The purpose of home loan tenure is to make it easier for you to repay the money that you have taken, in smaller chunks.
Choosing the best home loan tenure for you
The first instinct is to choose the longest possible home loan tenure. This is because it distributes the money you are repaying over a longer period. Although this is going to lower your EMI you need to keep in mind that your home loan will be costlier because you will be paying interest for all the months you are taking to repay.
Every financial institution or bank that provides you a home loan gives a calculator that allows you to try out various parameters and decide what’s the best tenure for you. You can use sliders or text boxes to enter different values and recalculate how much interest you need to pay for the tenure you have chosen, or what will be the home loan tenure depending on the EMI that you’re comfortable paying.
These are the things you should consider before settling with the best home loan tenure:
Your current incoming and outgoing cash
How much are you earning every month, and how much are you spending? Until you move into your new property, you may be paying rent, so you need to consider that too.
Aside from that, there are monthly household expenses, travel expenses, and operational expenses if you are self-employed and you need to spend money on sustaining and growing your business. What about school or college fees if your kids are still studying?
Use a spreadsheet to list all your monthly expenses in one column and all your incomes in another column and then decide your EMI. If you want to pay less, you may need to increase your home loan tenure. If you want to shorten your tenure, you can maybe curtail some of your expenses and pay more EMI.
The value and the scale of the property
Your EMIs depend on the amount of loan you are taking and how much loan you take depends on how much money you need to spend on the property you are considering buying. When evaluating a property, weigh in all the options. Would it deliver the value you’re expecting? Could you go with something less expensive so that it would make your home loan tenure more manageable? One should not compromise on their aspirations and dreams but they should also remember that they should not overcommit themselves and in the process, end up prolonging the tenure unnecessarily.
Make a bigger down payment
Home loans normally comprise 75-90% of the property cost. The remaining 10-25% is the down payment that you make. This means if you are buying a property worth Rs. 50 lakhs, the maximum loan that you’re going to get is 40 lakhs. This is where you can adjust your home loan tenure.
If you have made enough savings to pay Rs.15-20 lakhs instead of 10 lakhs, then do so. It will help you shorten your home loan tenure considerably. You can also opt for HomeCapital’s home down payment assistance program that provides interest-free credit to home buyers to pay the additional down payment to the developer.
The home loan tenure may impact your retirement
If you have a job, eventually you will retire. This means you won’t have a monthly income and you will survive on your pension or at the most provident fund. Hence, it is advised that your home loan tenure should expire 5-7 years before your retirement. Optimize your tenure accordingly.
There are multiple ways you can optimize your home loan tenure. You can use different parameters to calculate in advance what is going to be the duration of your tenure. Use the calculator. Talk to your financial advisor. Do your own calculations. But definitely spend an ample amount of time before you finalize your tenure.
Can you alter your tenure in the future or is it written in stone once you have taken the loan? You can change it. You can increase or decrease your EMI. You can make a lump-sum payment of multiple EMIs. You may be able to do so after a few years, but you can definitely shorten or lengthen your home loan tenure.
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