With escalating real estate prices, home loans are a popular source of finance for people looking to purchase their dream abode. And while we enjoy some freedom in selecting the ideal home loan, it is important to remember that the ultimate decision on the amount and tenure of your loan will be determined by your bank.
That being said, of course you will have some control over the tenure of your loan repayment. And it is imperative that you contemplate your home loan tenure carefully before you apply for one.
What is Your Monthly Income?
Your monthly income is the most important factor in determining the tenure. As a rule, your EMIs (the amount you spend every month to repay your loan) cannot be higher than 50% of your monthly income.
So let us say you earn Rs. 50,000 every month and you’re applying for a loan of 24 lakhs. If you choose a tenure of 20 years, you will be paying an EMI of around Rs. 24,000, which is roughly 50% of your monthly income.
In this case, you will have to choose this plan as your monthly income is too low to pay a higher EMI.
What to Keep in Mind
When choosing a home loan tenure, there are several factors you need to keep in mind.
- Interest Cost
Your EMI (equated monthly installment) is the amount you give the bank every month in order to repay the loan. It consists of two components – the principal (a part of the actual loan amount) and interest (the cost of taking a loan from the bank).
If you opt for a longer tenure, your EMIs will be substantially lower. However, you will end up paying a lot more money in the form of interest over time.
On the other hand, if you opt for a shorter home loan tenure, your EMIs will be a lot more, but most of the money will go into repaying the loan, and you’ll spend a lot less on interest.
Another factor to consider is whether you have dependents in your family like children or aging parents. When you’ve got other financial responsibilities to take care of, it’s best to take a longer home loan tenure with a smaller EMI amount.
This way you can easily pay the EMI every month and have enough money left over to take care of your family.
If you live alone or with a working spouse, it’s best to take a shorter tenure with higher EMIs so you can clear the loan as quickly as possible.
- Monthly Income
This is quite obvious, but you need to be earning enough to repay the loan that you’re planning to take. Select a loan tenure based on your monthly income and expenditure. If you’re earning a large sum and have enough surplus left over after your expenses, then it’s best to opt for a shorter tenure and clear the loan amount quickly.
- Credit Rating
Banks will inspect your credit rating before agreeing to grant you a home loan. So be sure to make all your payments on time and avoid writing cheques when there is the possibility that they may bounce.
With a higher credit score, the banks are sure to grant you a lower rate of interest on a home loan. This reduced interest rate will grant you greater financial flexibility, giving you more control while determining your home loan tenure.
- Your Age
Younger borrowers often have a higher chance of receiving a home loan for a longer tenure, as they have more working years left. Banks want to ensure that you will be able to repay the loan before you retire.
This means that if you’re availing a home loan at 45, your home loan tenure cannot extend beyond 15 years. Some banks recognize the retirement age as 65, but most lenders differ in their opinions of the retirement age.
Weigh Out All Your Options
Taking a home loan is a big step, and you want to be sure of what you’re getting into. So conduct a substantial amount of research and learn everything you can about home loans before even approaching a lender.
Also, you want to approach various lenders and figure out the interest rates they offer. This way you can select the most cost-effective option. Happy home-loan hunting!