[Decoded] What is the ideal term for your home loan? & nbsp | & nbsp Image source: & nbspBCCL
With home loan rates heading to an all-time low, this is probably the best time to buy a home. Home loans make home ownership convenient and affordable. If you have decided to buy a property by taking the help of a home purchase loan, there are several critical factors that you should keep in mind. Along with the loan amount, interest rates, and Equal Monthly Installments (EMI), an important factor that you should take into consideration is the term of the loan. The tenures of housing loans generally range from 5-30 years. You pay your equal monthly installments during this period.
While a longer term of a home loan from 20 to 30 years reduces EMI expense, it requires a higher interest payment. A shorter loan term increases the EMI liability but reduces the total amount of interest paid during the entire loan term. So a longer tenure translates into lower monthly payments than a shorter term home loan.
Here are four essential things that will help you choose the ideal term for your home loan.
Home loan tenure is usually synchronized with the age of the borrower. Therefore, if you are in your twenties or early thirties and are just starting out in your career, choosing a period of 20-30 years will be useful in helping you manage the increased financial responsibilities. Managing your regular expenses along with smaller EMI may be easier for you. You may opt for a shorter term home loan at this point in your career only when you are financially strong and able to take on a significant regional lending burden. If you are on the verge of 40 or about to retire, it is recommended that you go for a shorter period of time for a loan to meet the eligibility criteria of the bank.
Usually, the maximum loan term is set by the lender at 30 years. Some may go as high as 35 or even 40. However, tenure factors are the age at which the borrower will retire. For example, a 25-year-old is planning to retire at the age of 60, and can try to get a working term of 35 years. On the other hand, if you have 10 years to retire, this may be the maximum period you can have. Exceptions may be made for government employees who receive pensions and who can pay their comfortable monthly installments even in retirement.
The size of your loan
A higher loan condition means a higher commitment to a monthly installment. You should decide on the term of the loan taking into account your current income. For example, if your loan is about two to three times your annual income, you can choose a shorter period to avoid spending unnecessary extra interest. But if the loan is larger, it may be better to have a longer term to avoid putting pressure on your money.
Existing debt obligations
You should take into account existing debt obligations like personal loans, auto loans, credit card bills, gold loans, etc. While having many current debt obligations reduces your borrowing capacity to this extent, in order to increase your loan capacity, you have two options. The first option is to close your existing debt obligations if you wish to avail a short term loan. The second option is to apply for a loan of longer duration while continuing with other loans. You may decide to close your existing loan depending on your liquidity or your current financial situation.
Make the final decision
Your priority should be to keep the chances of defaulting on the loan as low as possible. You can reduce the chances of default by borrowing within the limits of your financial ability. While estimating your financial ability, you should take into consideration your current and expected future income, other financial goals, long-term income stability, etc. A home loan is one of the cheapest borrowing tools that also offers many tax advantages.
If you want to get out of debt quickly and have no liquidity constraints, you can choose a short to medium term home loan. On the other hand, if you want to enjoy the tax benefits under a home loan along with low cost financing and have limited ability to repay debts, you can opt for a longer term home loan. And during this period, if you ever get the chance to prepay your loan, take the opportunity to get out of debt.
Adel Shetty is guest contributor. The opinions expressed are subjective.