Home loan: Choose the best term
A home loan, usually being of a large amount
than other retail loans, is structured as a long-term loan.
While other retail loans are typically of a maximum tenure
of 5-7 years, housing loan tenures range from five to 20 years.
Most borrowers tend to borrow for the maximum
term they are eligible for, since EMI payments are lower for
longer –term loans. For example, for a Rs 10 lakhs housing
loan at an interest rate of 8%, the EMIs for 5,10,15 &
20 year tenures will be Rs. 20,277, Rs. 12,133, Rs. 9,557
and Rs. 8,365 respectively. Thus, the EMI for a 20-year loan
is significantly smaller than that of a 5-year loan.
However, the total amount that you will pay over the term
of the loan will be Rs. 12.17 lakhs for a five-year loan,
Rs 17.20 lakhs for a 15-year loan and Rs 20.08 lakhs for a
20-year loan. Thus, for a 5-year loan you would pay a total
interest of Rs 2.17 lakhs, Rs. 4.56 lakhs for a 15-years loan
and 20-years loan, the interest payout would total up to a
staggering Rs. 10.08 lakhs- on a principal of just Rs 10 lakhs.
It is obvious therefore; that the longer
the term of the loan, the higher will be the interest you
pay to your financier, even though the EMIs may be more manageable.
It is imperative therefore, to always consider whether you
need to go in for a long-term loan or if a shorter-term loan
would be suitable.
The longer the term of the loan, the higher
is the maximum loan amount you can avail for a given income.
For instance, for an 8% loan, for a gross monthly income of
Rs 50,000 you can avail of a maximum loan of Rs. 9.87 lakhs
for a 5-year tenure, but for a 20-year tenure you can avail
up to Rs 23.89 lakhs. Thus, if you need a higher loan, you
can consider going in for a longer term.
Financiers usually take care to ensure that
your debt servicing is comfortable and lend a maximum amount
such that the EMI dose not exceed 40% of your gross monthly
decided what EMI he would be comfortable servicing. In the
above example, you may require only Rs 9.87 lakhs. However,
for a 5-year tenure you’re EMI for Rs. 9.87 lakhs would
be Rs20,000. If you feel that your monthly expenses including
tax, salary deductions etc exceed Rs 30,000 you may wish to
reduce your EMI. By going in for a longer term, you can reduce
your EMI. By going in for a longer term, you can reduce your
EMI while keeping the loan amount constant. For instance,
for a 20-year loan of Rs. 9.87 lakhs at 8%, your EMI would
work out to just Rs 8,262 leaving you with a surplus of over
Rs 41,00 after deduction of EMI from GMI.
Thus, there are some circumstances in which
it may be preferable to choose a longer term. However, if
you are comfortable servicing the relatively higher EMI, you
should opt for a shorter-term loan, since your total interest
payout would be lower.
Choose your loan tenure; therefore, based
on both your desired loan amount as well as the EMI you are
comfortable servicing. Do not however, underestimate your
financial responsibilities, or overestimate the maximum EMI
you can repay. Consider the maximum EMI you would be comfortable
servicing currently and in future. If you expect your financial
responsibilities to increase, you may want to factor in a
buffer, and take a longer term, so that your repayments remain
Once the loan is disbursed, you should try
to make prepayments as frequently as possible so as to reduce
the principal and therefore the intrest burden, which is higher
for longer-term loans. For example, if you take a Rs 10 lakh,
20-year loan at 8% interest rate, and prepay Rs 1 lakh every
year, keeping your EMI constant, you will be able to repay
your loan in seven years, resulting in a total saving of almost
Rs 7 lakhs. The more you prepay initially, the more you save.
Over a long term, there are likely to be
many changes in interest rates and product offerings. Therefore,
it is essential to keep an eye on market developments and
where beneficial , switch to a more suitable product, either
with your current financier or with a new one.
Thus, by managing your housing loan actively
over its term, you can mitigate the drawbacks of a long-term
loan to some extent.