Being the owner of a home is probably one of the most proud feelings you’ll experience in your life. However, the journey to homeownership is one that is fraught with challenges. The first hurdle you have to cross is arranging the finances to purchase your dream home.
Luckily, this hurdle is easily crossed because you can secure a home loan. Of course, ensuring your loan application is not rejected is another huge challenge. To make sure your application is accepted, you must check the following things prior to starting your loan journey:
- Credit score (improve it if it isn’t that great!)
- The eligibility criteria set by the bank or NBFC you are hoping to secure a loan from
- Prepare all your documentation, such as bank statements, income details, proof of identity, proof of address, and complete property details
- Save ahead to make a large down payment so you can negotiate better loan terms and reduce the monthly EMIs
- Compare interest rates to make an educated decision. For example, check IDBI home loan interest rates and compare them with ICICI Bank, HDFC Bank, or any financial institution of your choice.
Wait, it is not the time to breathe a sigh of relief yet. One critical aspect of a home loan that most borrowers overlook is deciding on the loan tenure. Yes, the loan tenure is just as important as the loan amount and the interest rate. This is the period over which you have to repay the borrowed amount, and the tenure you choose will determine your monthly EMIs, total interest outflow, and overall financial stability.
But what is the ideal tenure for you? Should you opt for a longer tenure of 20 to 30 years or a short-term tenure of 10 to 15 years? Let’s help you make an educated decision.
What is the meaning of home loan tenure?
Home loan tenure means the duration of years for which the borrower repays the lender. In India, the term usually varies between 5 and 30 years based on numerous factors like age, income, repayment ability, and lender policies.
- Short-term home loans (5-15 years): Lesser EMIs but greater total interest paid.
- Long-term home loans (20-30 years): Smaller EMIs but greater interest burden over a longer period.
Selecting the appropriate tenure involves a trade-off between affordability and cost.
Considerations While Selecting Home Loan Tenure
- Affordability of Monthly EMI
Being able to pay EMIs is one of the major factors when choosing your home loan tenure. A longer-term lowers the burden of EMI, and it becomes affordable for you to pay every month. But a shorter term frees you from debt earlier and saves you money as interest payments.
- Total Interest Payable
The longer the tenure, the more interest is paid during the loan term. While longer tenures translate into lower EMIs, they very much raise the cost of borrowing.
Suppose you borrow a home loan of ₹50 lakh at an interest rate of 8%. Then:
- 15-year tenure: EMI = ₹47,783, Total Interest = ₹36.01 lakh
- 30-year tenure: EMI = ₹36,688, Total Interest = ₹82.89 lakh
As noticed earlier, increasing the loan duration can almost double the interest paid.
- Your Age and Career Stage
Your age is an important consideration in determining the optimal tenure. If you are 30 years old, a higher tenure would be appropriate as you have many working years left. But if you are 40 or 50 years old, it would be best to choose a shorter tenure so that you are not plagued by financial problems after retirement.
- Income Growth and Financial Stability
If your salary is likely to appreciate enormously in the next few years, then a shorter tenure may suit you. Increased earnings enable quick loan redemption through prepayment, minimizing the total interest burden.
- Prepayment and Foreclosure Facility
Most lenders permit prepayment and foreclosure without charges. If you anticipate getting bonuses, salary increments, or other streams of income, selecting a longer tenure with regular prepayments can prove prudent.
Pros and Cons of Short vs. Long Home Loan Tenure
| Loan tenure | Pros | Cons |
| Short-term (10 to 15 years) | Faster debt repayment, lower total interest cost | Higher EMIs, strain on monthly finances |
| Long-term (20 to 30 years) | Increased affordability, lower EMIs | Longer debt commitment, higher total interest |
Ideal Home Loan Tenure Based on Different Borrower Profiles
- Young professionals between the ages of 25 and 35
If this is your profile, you can opt for a home loan tenure of 20 to 30 years. This is because the EMIs will be lower. As a result, you’ll enjoy better cash flow management and investment opportunities.
You can opt for prepayments as your income grows so that the tenure can be reduced later.
- Mid-career individuals between the ages of 35 and 45
Is this your profile? Loan tenure of 15 to 20 years would be ideal as there would be potential for your salary to increase. The monthly EMIs and interest costs will be balanced.
If you are financially stable, you can consider a shorter tenure.
- Nearing retirement (between the ages of 45 and 55)
If this is your profile, it would be better to opt for a shorter loan tenure of 10 to 15 years. A shorter tenure means you won’t be carrying your debt into retirement.
Carefully choose a tenure that aligns with your retirement age.
Tips to Select Optimum Home Loan Tenure
- Employ a Home Loan EMI Calculator – Compare various tenure possibilities and how they affect EMI and interest.
- Plan Ahead for Future Expenses – Include education, medical, and other financial obligations before finalizing tenure.
- Go for a Step-Up Loan – Certain lenders provide loans with lower EMIs initially, followed by higher EMIs later.
- Negotiate Interest Rate – A smaller interest rate maintains both short and long tenures effectively.
- Work Towards Early Closing of Loan – Even if you opt for long tenure, work towards prepayment as much as possible to pay less interest.
Conclusion
The optimal tenure of a home loan is relative and varies with your financial health, age, earnings, and appetite for risk. While long-duration home loans bring flexibility in reduced EMIs, they add up to a higher cost of interest overall. Short-term home loans minimize interest but are accompanied by the need for regular higher monthly payables. The ideal method is to select a tenure that suits your financial objectives while ensuring that the total cost of borrowing remains under control. Strategic planning and controlled prepayments can enable you to maximize your home loan tenure to the greatest advantage.