Choosing home loan tenure is an as important option as choosing an interest rate for the loan or focus on repayment and prepayment options.
In the recent times, choosing the right tenure becomes even more important as interest rates show signs of going up further.
There are several factors to be considered when one decides to take a home loan for a certain period.
The first important factor is the age. The younger the age, higher the tenure available. This means, if one decides to take a loan in his 30’s, he can get a loan for 20 years-the maximum loan tenure offered. Some banks offer home loans for 25 years but that is an exception rather than the rule. According to the eligibility criteria of the banks, age of retirement is 60 years in case of salaried and 65 years in case of self-employed.
When taking a loan, one must take into account the fact that interest rates fluctuate during the loan tenure. The fluctuation will impact the home loan EMI, whether one takes a loan at a fixed interest rate or floating interest rate.
If the loan borrower is younger, he can get an extension in his loan tenure. The maximum loan tenure is 25 years. If the loan borrower is in his 40’s, the only option available in such as case would be to increase the EMI.
This is easier said than done. The reason is, by the time one is in 40’s, the rate of increase in potential income is much lesser as compared to what one can expect at a younger age.
Another benefit of a younger age is the increased loan eligibility. Even though the current income is taken into account while giving a loan, the potential of increase in salary is also taken as a factor. So, one can easily opt for a top-up loan to meet personal needs or take care of an increased EMI. There are repayment options such as Step-Up repayment facility or SURF where the EMI is low in the initial period and increases at a later stage. This could be ideal for a young borrower who is climbing rungs professionally. But, this is an option available for the younger lot.
Let’s take an example. A 30-year old individual, ‘A’ takes a home loan of Rs. 30 lakh at an interest rate of 9 per cent for 20 years. ‘A’ earns about Rs. 50, 000 per month. The interest rate increases to 11 per cent in 2008. Since ‘A’ is 30-years old, he has an option of increasing the loan tenure to 25 years. By the time in 2008, interest rates increase, his salary has also increased to Rs. 77, 140 in an annual increment of 7 per cent year on year in his net salary.
Impact of changed rates with the tenure increase option
|Situation in 2003
|Situation in 2008 if the tenure is increased to 25 years
However, if ‘A’ was in his 40’s, the option of increasing the loan tenure would not be available. He would have to increase his EMI.
Impact of changed rates if the EMI is increased
|Situation in 2003
|Situation in 2008 if the EMI is increased