Factors to Consider When Choosing a Home Loan Tenure in 2020

Budget 2020 has continuing good news for future homeowners. The Budget has proposed extending the exemption offered on the interest portion of affordable housing loans for another year, until March 2021.

If you’ve decided to take a home loan in 2020, know that all facets of a home loan are inter-linked. Therefore, you need to make an informed decision as this may be your biggest financial commitment, lasting up to 30 years.

So, here are the factors that you should consider when choosing your loan tenure:

Longer loan tenure = higher interest payment

The tenure of your loan and the total interest you will pay are directly proportional. The longer the loan tenure, the higher the interest payment, and vice versa.

Let’s say that you are opting for home loan of Rs.45 lakh and the interest charged is 8.5% p.a. For a tenure of 15 years, the total interest payable on the loan will be Rs.34,76,390. With all other factors remaining constant, for a tenure of 25 years, the total interest payable on the loan will be Rs.63,70,566. The difference in the interest payment between the tenures is Rs.28,94,176.

Longer loan tenure equals lower EMIs

Going in another direction, if you choose a longer repayment tenure, your EMIs (equated monthly installments) will come down. This means that you will have more cash flow to take care of other financial needs. Taking the same example, the EMI for a 15-year tenure will be Rs.44,313, while the EMI on a 25-year tenure will be Rs. 36,235.

If you are splitting the EMIs with a co-borrower such as your spouse and have two incomes, you could consider opting for a shorter tenure, so you can save on interest and have sufficient income for other expenses. However, if you cannot afford to pay higher EMIs, you should consider a longer repayment tenure, so you can pay off this debt comfortably while focusing on other financial needs.

Higher loan amount equals longer loan tenure

Although these factors are not directly linked to one another, in most cases, the higher the loan amount, the longer you may take to repay the loan. This is because higher loan amounts attract higher interest rates, thereby, increasing the overall cost of the loan. So, if you cannot afford to pay higher EMIs every month, the only way to decrease your monthly installment amount would be to choose a longer loan tenure.

Longer loan tenure equals possibility of more part-payments

Your EMIs go towards servicing the principal and interest portions of your home loan. However, every bank and financial institution allows you to prepay a part of your principal loan amount every year. This prepayment will go towards servicing your principal loan amount, therefore, reducing your outstanding balance. And as most financial institutions charge interest on a reducing basis (outstanding balance), the interest comes down. You can make multiple part-payments every year.

So, here you will have two options – one is to keep your EMIs constant and reduce your loan tenure or decrease your EMIs and keep your loan tenure constant. Choosing the latter will once again help you save on interest without hurting your financial commitments.

Consider these factors when you decide which loan tenure works best for you. Banks and other financial institutions offer repayment tenures between 1 and 30 years.

Note: I have used the BankBazaar Home Loan EMI Calculator for illustrations. They are estimations, the actual rates and payments will differ according to the lender chosen and the terms of agreement.