How to Decide an Ideal Home Loan Tenure &EMIs?

Most of the people are aware of the tool called housing loan EMI calculator, which helps in getting the EMI amount one needs to pay. This is based on the amount of loan taken, the tenure of the loan and the prevailing interest rates on the home loan. As interest rates are at the discretion of the lending agencies, it’s only the tenure and the amount of loan that one can play with. One would like to use the housing loan EMI calculator to arrive at the EMI that he or she is most comfortable paying. The question, however, is how to decide what an ideal tenure or EMI is.

What Is Home Loan Tenure?

Home loan tenure is the length of time that the borrower gets to repay the entire principal that he or she has taken along with the interest to the lending institution. This tenure generally varies in the range of 5 – 20 years of duration. In some cases, the lending agencies can also allow a tenure of 25 years. The loan tenure is determined by three major factors and these are:

Age of the borrower
Income of the borrower
Purpose of buying the property

Let’s discuss these factors in detail and see how each of these impacts the tenure of the home loan.

Age of the Borrower

The bank or any lending institution is always willing to give a longer duration of the loan to those who are in their 20s or 30s. This is because they know that it is a safer bet as these people are most likely to continue earning even after 20-25 years. On the contrary, a person in his late 50s will retire in the next 10-12 years. It is not feasible for him to take a 20-25 year loan as extending the EMI payments once you are retired is a risky choice for both the borrower as well as the banks.

For a person who has already turned 50, taking a 10-year loan is also not wise if he or she has opted for a flexible interest rate. The flexible interest rate will definitely change in a 10-year duration. It might reduce or move up. In case it reduces, it’s fine as you will pay off your loan before retirement. But, in case the rates go up and you are not able to afford the increased EMIs, then the other choice one has is to extend the loan tenure. This means that the tenure will then extend beyond your career span and in the absence of regular income, you might not be able to pay the EMIs and hence default on your loan payment.

Income of the Borrower

It is your gross monthly income that determines your ability to pay an EMI. You need a certain part of your salary for your regular expenses and the remaining you can commit for your home loan EMI. If you go for a short tenure loan, then obviously the EMI amount will be higher and vice versa.

In case you already have some other debt or loan on you, then your capacity of paying an additional EMI will be limited. The lenders look at DTI (Debt-to-Income) ratios to decide whether or not the borrower is in a position to take any more debt. The studies suggest that the highest DTI ratio that one can manage is 43%. The lenders are generally not willing to lend any more money to people hovering around 40% DTI. The preferable limit is, however, below 36%; the lesser, the better!

Additional Read: Tips to Manage Your Home Loan EMI

Purpose of Buying the Property

Some people take a home loan to avail tax benefits. One can make use of home loan tax benefit calculator to see how much benefit they can get. The EMI consists of two components, which are Principal and Interest. Now, the interest component in the EMI depends not only on the rate of interest but also on the tenure of the loan. If one has opted for a longer duration of a loan, the total amount of interest payable is more as you need to pay it for a longer time. The home loan interest calculator can help you get the exact amount of interest that you will have to shell out.

In layman’s terms, at the same rate of interest, the short term loan comes out cheaper than a longer loan term. Now, the purpose of buying the property comes into the picture. If you want to invest in it for a profit, it is better to go for a shorter duration. Once the property price escalates and you get your desired returns, you can sell and get out of it pocketing your profit. A shorter loan tenure always provides a better return on investment. You can check it on a housing loan EMI calculator.

With a housing loan EMI calculator at your disposal, you need not to be concerned about how to calculate home loan EMI as it is an instant job done. Coming to the tenure of the loan, it is generally better to opt for longer duration except when you are buying it as an investment but having an option of prepayment. Now, this prepayment should ideally be negotiated with no penalty charges or minimum charges (if any). If you opt for lower tenure and hence higher EMIs, then there is a risk of default (for example, in case of a medical emergency).

Author Since: Jan 17, 2019

Anoop Bansal, a professional Chartered Accountant based in the National Capital - Delhi. I have worked for the top-notch Indian and International banking firms for the past 10 years. Currently, I work at blog and a financial consultant for different SMEs in India. Follow me on Facebook, Twitter and Linkedin for more information.

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