A Home Loan has one of the most extended repayment schedules in the banking industry. It has to be because the investment is a substantial one. The borrowers need time to repay the loan. Banks follow a method of calculating the Home Loan tenure. It depends on various factors:
- The loan amount
- The rate of interest on the loan
- The age of the applicant
- The income of the borrower
- The employment status of the borrower
- The repaying capacity of the borrower
The repayment tenure can be anything from 10 years to a maximum of 30 years. Is it beneficial to opt for a long tenure or should one go for a short tenure? There are mixed opinions in this regard. Some people prefer to go for a short tenure to get rid of the loan liability as soon as possible. At the same time, some borrowers wish for a longer tenure to limit their immediate obligations.
We shall look at the advantages and disadvantages of having both a short and long tenure.
Advantages of a short Home Loan tenure
- Some banks have concessional rates of interest for tenures up to 10 years. You can take advantage of these reduced rates.
- A shorter tenure will result in the early liquidation of the loan liability.
- Pay lower overall interest on the home loan.
Disadvantages of a short Home Loan tenure
- The Equated Monthly Instalment (EMI) is high.
- Your immediate liabilities will increase thereby leaving you with less disposable income.
- Your Fixed Obligation to Income Ratio (FOIR) will increase thus making it difficult to apply for other loans as long as the home loan is outstanding.
- You can claim income tax benefits for a shorter period.
Advantages of extended Home Loan tenure
- Your immediate liabilities will reduce thereby increasing your disposable income.
- You will have a lower FOIR that enables you to apply for other loans easily.
- You can claim income tax benefits for an extended
Disadvantages of extended Home Loan tenure
- You do not benefit from the concessions on the Home Loan Interest Rates.
- Your total outlay of funds will be more.
Which of the two options is better?
It depends on the following factors:
- Income – A higher level of income will enable you to go for a shorter tenure. If you can combine the income of your spouse, you ensure to close the Home Loan early. Double income earning families can opt for shorter tenure.
- Repaying capacity – If you have other loan liabilities, it can affect the repayment of your Home Loan. Your FOIR will not permit you to go for shorter tenure.
- Disposable income – In the ordinary course, you need at least 40% of your income for meeting your monthly expenses. You should decide on the loan tenure based on this calculation.
- Contingent liabilities – You might not have any immediate obligations. However, you might incur additional expenses shortly in the form of higher education of children, medical expenses of aged parents, marriage expenses, and so on. Opting for short Home Loan tenure can be a hindrance because of the higher monthly repayment liability. It is better to go for an extended repayment schedule under such circumstances.
Can you extend your Home Loan tenure?
You can extend your Home Loan tenure provided:
- You have age on your side. The maximum age at the maturity of the Home Loan should be 70 years.
- The Housing Loan product should permit you to do so. The maximum tenure is 30 years.
How can you extend your Home Loan tenure?
You have to approach the bank/lender and apply for an extension of the Home Loan by explaining the circumstances. Banks normally accede to such requests because it benefits them. Imposing a higher instalment liability on the borrower can result in the default in the payment of instalments leading to the bank exploring recovery options. To avoid such an eventuality, they agree to the borrower’s request.
- The bank has to recalculate your loan instalment depending on the extended period.
- You have to execute a fresh set of loan documents because of the extension in the loan tenure.
- You have to pay a specific amount as tenure conversion fees.
Can you avoid this formality?
Yes, you can. You should go for a long tenure at the initial stage itself. You are free to pay any amount more than the loan EMI every month, especially if you avail the loan from banks. In this way, you can save on the interest component. In an emergency, you can always revert to paying the original EMI. The banks are not going to question you in this regard. You can take advantage of the Online Home Loan Process that allows you to repay your instalments online.
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