Buying a home is a very complicated task and so is finding the right home loan. It takes months to compare and decide the right locality, right builder, suitable cost and so on and so forth. Leading banks and NBFCs (Non-Banking Financial Companies) offer two types of home loans – short-term and long-term home loans. Ultimately, it is your decision whether you should opt for a short-term or long-term home loan based on your capacity to repay. Here are some factors that will help you decide the term of home loans.
Income of the Borrower
It goes without saying that your income influences the amount of home loan you are eligible for. Therefore, you must plan and prioritize your expenses before concluding the home loan tenure. You should be able to repay the home loan in the form of EMIs (Equated Monthly Installments) in a time-bound manner. And a shorter tenure means higher EMIs per month. For example, if you have taken a home loan of Rs. 30 lakhs at 11% for 20 years, your EMI would be Rs. 30,966. But if the same home loan has been taken for 10 years, the EMI would be Rs. 41, 325. So, you will have to handle the extra burden of Rs. 10,359 monthly installments. In case you opt for later option, make sure that you have ample means to support you for the entire loan period.
If your monthly income is sufficient to meet all your expenses while going with higher monthly EMIs, short-term tenure could be a good idea as you will be able to get rid of the debt early. On the other hand, if your income is low, you should opt for a long-term home loan in order to reduce the monthly burden.
Age of the Borrower
Age is not just a number when it comes to sanctioning any loans. This is one of the most important parameters that the lender will look into while deciding your home loan term. The basic premise of approving a loan is - the older you are, lesser will be the home loan tenure and the younger you are, longer will be your home loan tenure. For instance, if you are between 20 and 30 and have just started earning, you can apply for a longer home loan tenure, because this will give you ample time to repay your liability. Whereas, if you are between 40 and 50, you will have no choice but to go for a shorter home loan period to repay your debt. Also, if you are going to retire in next 3 to 5 years, you may have to apply for a joint home loan with your child, by stating him/ her as the co-applicant (remember: a co-owner is a person who has a share in the property and a co-borrower is a person who will be liable to repay the debt) in the home loan. This is so because after your retirement, the home loan tenure will be based on the age of your child.
The rate of interest
The rate of interest plays very important role in determining your home loan tenure because this is the cost of credit that you pay for borrowing the home loan. Higher the home loan rate of interest, greater will be the cost of credit or vice versa. Don’t forget that you will have to pay this cost of credit until the end of the term of the home loan. So, make use of EMI Calculator available on afinoz.com to calculate your cost of credit for 'N' number of years. This will help you budget your expenses.
While applying for a home loan, you need to check whether the rate of interest is fixed or floating: a fixed interest rate remains same irrespective of market rates and floating interest rate keeps changing with market trends. And also don’t forget to take into account the extra amount or EMIs you pay, other than your home loan EMIs.
How to decide between short-term and long-term home loan tenure?
It is very important to understand that shorter tenure entails lesser cost of credit and long-term home loan means that you will be required to pay higher amount as interest. In above example, in case of 20 years, the total amount of interest paid will be Rs. 44,31,756, while the interest rate paid will be Rs. 19,59,000 in case of a 10-year tenure. So, there is a staggering difference of Rs. 24,72,756.
On the other hand, if you choose the short-term home loan, you may end up paying high EMIs which will eat a big chunk of your monthly salary. So, you need to strike the balance between two based on your income, age, daily expenses etc. To explore best home loan schemes from different lenders, log on to www.afinoz.com or mail us at firstname.lastname@example.org. We are here to serve you the best financial products without any hassles.