Among the many questions that pop up in your mind when you think of a home loan, a common question is the tenure of your loan. Should I go for a 15-year loan or 20-year loan?
Well, it’s not a straight answer. Longer the loan tenure, higher the loan amount.
Did you know the amount of loan that you are eligible depends on the tenure you choose? Many people postpone purchase of a house because they feel their current income is not sufficient to get a loan commensurate with the cost of the house they have in mind. If you are one of those, you should try to calculate your eligibility with the maximum loan tenure. You may be surprised to find that suddenly your dream home is very much a possibility.
Assume, your monthly income is Rs 50,000 and to fund the house you have in mind, you require a home loan of Rs 24 lakh. Are you eligible for the loan? You may manage to get the loan if the tenure is 20 years, but will not be eligible for the loan with a shorter tenure. This is because your loan amount eligibility is calculated as a percentage of your monthly income. Banks sanction home loans where the equated monthly installment (EMI) is 35 per cent to 50 per cent of your monthly income. The EMI for a Rs 24 lakh loan would be around Rs 24,000 for a 20-year period and Rs 27,000 for a 15-year period and Rs 32,000 for a 10-year period. In the above instance, the EMI of the 20-year loan is well within 50 per cent of your monthly income, whereas the EMI for the 15-year and 10-year loan is beyond 50 per cent of your monthly income.
So, if the loan eligibility is a constraint, then go for the longest possible tenure (some banks allow 25 years though most banks allow only up to 20 years). The maximum tenure is also restricted by your age at the end of the tenure. Thus, a 45-year-old person cannot get a 20-year loan as he will be long past retirement by then. So, he will be eligible only for a 15-year loan. If he is self-employed, then the bank may consider a 20-year loan as the retirement age for a self-employed person is assumed at 65 by most banks.
{{/usCountry}}So, if the loan eligibility is a constraint, then go for the longest possible tenure (some banks allow 25 years though most banks allow only up to 20 years). The maximum tenure is also restricted by your age at the end of the tenure. Thus, a 45-year-old person cannot get a 20-year loan as he will be long past retirement by then. So, he will be eligible only for a 15-year loan. If he is self-employed, then the bank may consider a 20-year loan as the retirement age for a self-employed person is assumed at 65 by most banks.
{{/usCountry}}Reduce EMI burden through a longer tenure loan
Many people in their anxiety to pay off the home loan as quickly as possible, take on a bigger than warranted EMI burden by restricting the tenure. Even if the loan eligibility is not a constraint, you should opt for the longest tenure possible with a no prepayment penalty option. This way you retain the flexibility of low EMIs and at the same time you can pre-pay the loan whenever you have surplus funds.
(The author is CEO of apnaloan.com)