Which is Ideal Tenure for Home Loans? Short Tenure or Long Tenure

It is perfectly true that shorter the tenure of home loan, lesser will be the home loan interest outgo. It can be proved mathematically also by following example:

Let's assume Mr Ajay has taken a home loan of Rs 50 lakhs at 8.50% from a bank. Let's now compare the interests that he needs to pay for different tenures on the borrowed amount:

Tenure	EMI (Rs)	Interest (Rs)	Total repayment (Rs)	Interest as % of Loan Amount
15 years	49237	38.62 lakhs	88.62 lakhs	77.25%
20 years	43391	54.14 lakhs	104.14 lakhs	108.28%
25 years	40261	70.78 lakhs	120.78 lakhs	141.56%
30 years	38445	88.40 lakhs	138.40 lakhs	176.80%

From above example, it is very clear that longer the tenure, higher is the interest that Ajay needs to pay.

Home loan is provided for a longer tenure and for a higher amount. This is the reason why home loan is a huge financial burden for the borrower and hence, it needs to be managed in a very careful and appropriate manner.

It is very subjective to decide whether it is better to avail a short term home loan or long term home loan. It depends upon the financial condition, loan repayment capacity and other financial goals of the borrower.

However, following facts can be helpful and can be considered by the home loan borrowers while deciding upon the home loan tenure:

Fact 1: EMI Eligibility

Home loan lenders have to ensure that sum of EMIs of all the loans (such as home loan, vehicle loan, personal loan, etc.) should not exceed more than 40% to 45% of the borrower's monthly income. So if his/ her monthly income is Rs 1 lakh, then he/ she is eligible for availing home loan whose EMI together with all the other loans EMIs is less than Rs 40,000 to Rs 45,000.

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Fact 2: EMI Affordability

It is also very important point that how much EMI can one afford. He has to look at his other responsibilities too such as save for education and wedding of children or any other financial responsibility. Accordingly, he can decide upon the home loan EMI that can be paid by him. He needs to decide it very carefully as home loan is a long term liability.

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Fact 3: Tax Benefits

If someone wants to take benefit of income tax rebate for longer period of time, then he can opt for longer tenure.

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Fact 4: Future Repayment Capability

At the time of availing home loan, one needs to check the number of years he will be working. If he is taken loan near his retirement then he should go for shorter tenure, as after retirement, his monthly earning will come down and he will not be that much capable of paying higher EMIs after retirement.

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Fact 5: Opportunity Cost

As home loan is available at very cheaper interest rate as compared to other forms of loans, such as personal loan, business loan, car loan, education loan, etc. Further, tax benefit is also available in case of home loan which further reduces its cost; one may feel to continue with longer tenure even if he is capable to afford more EMI.

If a person is able to invest his surplus funds in an instrument which generates more returns than he has to pay towards home loan interest then it is better to keep the tenure of home loan longer.

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Share This : Anupama is a Co-Founder of CodeForBanks.com. She is an MBA (Finance) and Chartered Financial Analyst (CFA). She also carries a Fellowship degree in Life Insurance Sector and is a Master of Computer Application (MCA). She is an expert in Finance Field with an experience of over 18 years on different managerial positions in finance industry including Stock Market, Depository and Mutual Fund Sectors. Apart from that she has remained for few years in the field of marketing as well. Her suggestions and advice for investments have been very useful to many people.
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