Selecting the right tenure for your loan can reduce your overall loan burden. Hence, do your due diligence on your income, loan amount, and time left to service your loan to opt for the right tenure
Buying your own house is one of the biggest investments in life. Since it is a high-ticket transaction that cannot be undone or undertaken often, it becomes important for buyers to evaluate every step of the process carefully. One of the critical things we need to assess at the time of purchasing a home is the home loan. And while there are multiple factors to consider and negotiate on, one factor that has a significant impact on your money outflow, in the long run,is the tenure of the loan.
Why is it essential to analyse and negotiate on a home loan tenure? Here are five factors that impact the loan tenure and understanding them better can help you choose the right tenure for your home loan.
Typically, the repayment tenure for a home loan can start from five years and go up to 30 years. Some lenders are maybe even willing to look at 35 years in exceptional cases.
The tenure has a direct impact on your EMI and the interest you end up repaying. This is because the interest payable on the loan is calculated at the beginning based on the projected tenure and then the principal and interest are split into monthly instalments, i.e., the EMI. So, the longer the tenure, the higher the interest accrued on the loan. A longer tenure gives you the benefit of smaller EMIs, but the overall interest you end up paying goes up. Similarly, if you choose a shorter duration then your EMI will be higher but your total interest will be much lesser.
It is essential to hit the sweet spot between the tenure and EMIs as the home loan is a long-term financial commitment, and one that you are required to pay consistently and effortlessly as not being able to do so will have very serious consequences for your financial and emotional stability.
If you are in your 20s or 30s, then it makes sense to choose a longer tenure of 20-30 years. Doing this will help you manage your loan well in the current time, which will have a positive impact on your credit score. You may even be able to use this opportunity to negotiate for a lower rate basis your consistent repayments in the first few years of the repayment. You can always clear your debts when you have got additional money to pay your home loan partially or fully. But ensure your home loan lender allows you to pre-pay or foreclose the loan without any penalty.
Your age may also impact the tenure you will be eligible for. For example, a 25-year-old borrower will retire at 60. So, they can choose a 30–35-year home loan tenure. A 40-year-old person may need to go for a loan of tenure less than 20 years so that they can clear their debts before their retirement. However, if you are a pension-drawing employee then you can consider a tenure even beyond your retirement as you will still have a regular flow of income.
Your tenure is also a function of your income. A simple calculation can tell you what will be your EMI obligation if you choose a particular tenure. Lenders consider the Fixed Obligations to Income Ratio (FOIR), which is a measure of your overall obligations including EMIs, fixed expenses such as rents, food and groceries, etc. while considering a loan application. Typically, it is advisable to keep the overall FOIR around 50-60 per cent. This means you should not have an EMI of more than 30-40 per cent of your total monthly income so that managing all other expenses and emergencies do not put any undue stress on your finances. That is why it is essential to take your current income into account while deciding on the home loan tenure. An ideal tenure would ensure that your EMI remains well below the FOIR so that you do not have a problem in getting the loan approved or in repaying it.
Home loan amount
A higher amount home loan means a higher EMI as the principal and the interest accrued on the principal are both high. So, the shorter the tenure, the fewer would be the instalments but higher would be their size. As a thumb rule, you must ensure that you don’t default on your home loan repayment as much as possible. You can lower this risk by borrowing only what you require and what you can comfortably pay back to a financial institution, i.e., by maintaining your FOIR.
- The author is CEO of BankBazaar, an online marketplace for financial products
- The views of the author in this article are personal and do not constitute professional advice of Times Property
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