Factors that determine the ideal tenor of your home loan

The tenor of a home loan can stretch up to 30 years. This financial product enables individuals to fulfil their dream of owning a home but managing the loan repayment for such a long tenor can be a daunting task. Here, tenor refers to the length of time borrowers take to repay the loan amount along with interest in the form of EMI.

Hence, to choose the right EMI amount, borrowers must select an ideal tenor of a home loanwhich depends on certain key factors. 

What are the factors determining the ideal tenor of your home loan?

Several factors determine the ideal tenor of your home loan. They are:      

Applicant’s age

One of the prime factors determining the home loan tenor is the applicant’s age. As stated earlier, a home loan comes with a repayment tenor of up to 30 years. Therefore, applicants aged between 20 and 30 can easily apply and get approval for a housing loan as they still have enough time in retirement and can utilize the maximum loan tenor offered.

On the other hand, individuals who are between 45 and 50 years and approaching retirement age can hardly get the approval the settle for a long tenor. It means individuals falling under such age range will get a maximum of 15-20 (till their retirement age) years of time to repay the loan amount. 

Applying for a home loan in the late working age can burden borrowers with high EMI. For instance, an individual (whose age is 45 years) applies for a home loan of Rs.2500000 at a 12% interest rate for 15 years. Here, individuals have to pay Rs.30004 as EMI. Managing such a huge amount every month can be overwhelming for an applicant of such age. 

However, applicants have to repay before retirement if the interest rate does not change (depending on the type of interest chosen). If the interest rate increases, individuals have to apply for a home loan extension and continue repayment after their working age with other income.  

Applicant’s income

The applicant’s gross monthly income is the second important factor that decides the home loan tenor. Along with this, applicants’ future income or obligations also help in determining loan tenure. Loan tenor and EMI are related, and EMI depends on one’s ability to repay a certain amount every month without any fail throughout the loan tenor. 

Here, individuals have to decide on an ideal tenor to select a suitable EMI as per their monthly income and financial standing. If individuals opt for a shorter home loan tenure, they have to pay high EMI. On the other hand, applicants have to pay low EMI if they select a longer home loan tenor. 

In order to close a loan account within a short span of time, individuals often tend to choose a shorter tenor. This results in cutting a massive chunk of money every month from the borrower’s pocket. For instance, if individuals take a home loan of Rs.2500000 for 20 years at the interest rate of 12%, they have to pay Rs.27527 as EMI. But, if individuals avail the same amount of housing loan for 10 years, they have to pay Rs.35868.??

To assess the monthly payables beforehand, individuals can use a home loan calculator to adjust loan amount and tenor, interest rate to learn EMI and total payable. Lending institutions assume that 55% – 60% of one’s disposable income is available for loan repayment. Therefore, if the applicant’s income permits payment of such an amount, they can opt for a short tenor or vice versa. 

Interest rate

The third and last important home loan deciding factor is the current home loan interest rate. Home loan EMI consists of both principal and interest. A lower interest rate reduces the EMI burden and vice versa. However, applicants can increase EMI by opting for a short tenor.

Here, individuals must know that the total cost of borrowing depends on the interest rate and tenor. If the loan tenor is high, individuals have to pay a high amount of interest at the end of the loan tenor. On the other hand, if individuals select a short tenor, their total interest outgo will be lower. Therefore, individuals can understand that short tenor can be beneficial for borrowers if they can manage high EMI and vice versa.

Suppose individuals have taken a home loan of Rs.2500000 for 12 years at the interest rate of 12%, they have to pay Rs.2228403 as the total interest amount. Simultaneously, they have to pay Rs.32835 as EMI and Rs.4728403 as the total repayment amount (principal and interest). 

If that individual avails the same amount of money as a home loan for 24 years, they have to pay Rs.5134193 as the total interest amount. Along with that, they have to pay Rs.26510 as EMI and Rs.7634193 as the total repayment amount (principal and interest). 

Note that individuals can enjoy home loan tax benefits under Section 80 C and Section 24. The first section allows a tax deduction of up to Rs.1.5 lakh on the principal portion of EMI paid in a financial year. The latter section facilitates tax deduction of up to Rs.2 lakh on the interest portion of EMI in a financial year. 

Renowned lending institutions provide eligible individuals with high-value home loans at competitive rates. 

These financial institutions also provide a pre-approved offer to make the loan-availing experience hassle-free. These offers are also available for other financial products such as loans against property, home loans, etc. Individuals can check their pre-approved offers by entering names and contact details. 

Now that individuals know the key factors affecting housing loan tenor, deciding on an ideal home loan tenor will no longer be a hassle.