Buying the home of your dreams often comes at the price of a heavy loan. It is a big move, financially and personally. The right home loan often takes a lot. Many factors go into assessing your appetite for a home loan. Home loan tenure is one of the most overlooked factors. A home loan tenure basically means the duration of time in months, for EMI payment of the home loan. The home loan tenure has direct impact on your cost of borrowing. Which further impacts the overall cost of the property.
Home loan tenure is one of the crucial decisions during the home loan process. Since a home loan brings along increased liabilities in the form of timely monthly payments – also known as home loan emi and high interest, be it a short term home loan or a long term home loan.
Factors which influence the home loan tenure include the following.
1. Home Loan Amount
2. Home Loan Interest Rate
3. EMI
4. Age of the Borrower
While the pros and cons of tenure of home loan vary on the basis of each loan borrower’s appetite, here are a few advantages of going for a longer home loan.
1. Higher Loan Eligibility – Financial institutions and banks have a fixed criteria to decide upon the home loan eligibility of each borrower. To determine the amount to be sanctioned, the loan borrower’s repayment ability is analysed. This is assessed on the disposable income of the individual. The ability to repay EMIs of the home loan every month. Hence, all other factors being normal, a shorter home loan tenure will lead to a higher EMI and hence a smaller home loan amount. A longer home loan tenure will lead to smaller EMIs and the chance to avail a larger home loan amount.
2. Payment Flexibility – There are no penalties on prepayment of home loans under a floating rate of interest. In case you plan to be free of debts or plan to sell the house on loan, you can prepay the part or entire outstanding home loan.
If you have opted for a home loan under a fixed rate of interest, from a housing finance company, you can still prepay the home loan without any penalty, if you have not borrowed from another institution. You can repay a certain percentage of your outstanding home loan every year, without any prepayment penalty. This particular feature helps in retaining your home, yet manage your cash flows as per your income.
3. Income tax benefits – As per Section 24B of the Income Tax Act, it provides benefits to the borrowers on the interest rate levied on the home loan which is comparatively higher than any other alternate investment avenue. The tax benefit availed is more efficient over other investment avenues, hence it is advisable to avail the advantage for a longer time through extended longer home loan tenure.
While filing an income tax return, you can avail the tax benefit on home loan through tax deductions, under different sections of the Income Tax Act.
As per Section 80C of the Income Tax Act, a deduction of up to 1.50 Lakhs is allowed on the amount paid as the principal amount of the home loan. In shorter term home loan tenure, the repayment on principal amount is higher than those on long term home loan tenure. Hence, a significant portion of the home loan repayment will get wasted, you will not be able to claim deduction for a larger sanctioned amount, beyond the specified limit, under Section 80C unless you take a long-term home plan.
Opting for a home loan of long tenure should also come with an option to make a prepayment of the loan with less penalty or no charges altogether.
Lon term loan tenures, will again take away risky situations which come with short term home loans, that of paying high EMIs and instead help in saving money for emergency and unforeseen circumstances.
Also, accumulating the savings can help in making part prepayment of the home loan. Reducing emi’s from the monthly home loan emi calculator and reducing the loan tenure or get rid of the entire loan amount itself.
