How to choose the right home loan tenure for your budget

Written By- Jaya Pathak

The purchasing of home is one of the crucial financial decisions to be made. While choosing the right option for you, there are various factors that you might consider which will affect the monthly payments, interest costs and the overall financial stability.  The right home loan tenure plays a significant role in determining your monthly cash flow, total interest outcome and the long term financial health.

In this blog, we are going to know how you can choose a right home loan tenure in your budget.

What is Home Loan Tenure?

In very simple words, home loan tenure is the time duration in which the borrower agrees to repay the borrowed amount along with interest. Generally, it ranges from 10 to 13 years, though some of the lenders may offer longer periods of time. The home loan tenure influences directly your equated monthly installment (EMIs) and the total interest paid in over the life of the loan.

Key points to be noted

• The home loan tenure impacts your monthly payments. The longer loan tenure might produce your equated monthly instalment which will bring an ease to the monthly cash flow. It is quite beneficial if your source of income is not that much steady or you have already made some other financial commitments.
• You can have a shorter home loan tenure than normal depends upon how much will you provide higher equated monthly instalments but overall you will pay less interest as your principal is repaid faster. Hence, the home loan tenure increases the payments but it also increases the cumulative interests with a considerable margin.
• You should wisely choose the appropriate home loan tenure as it stands as a balancing force between affordability in the shorter term and the overall financial savings in the long term period. Therefore, it becomes quite essential for you to align the home loan tenure with your current financial situation and future economic goals.

Factors to consider before considering home loan tenure

There are various factors which you should consider before choosing the home loan tenure for you. Some of them are listed below:

1. Before considering the home loan tenure, you should first assess your financial situations. For that purpose, you can conduct a thorough assessment of your income, expenses, savings and other financial commitments. The evaluation of your current financial situation will give you a clear understanding of your cash flow which will help you to determine how much you can afford to pay the EMIs without straining much to your budget.

The assessment of your financial situation will provide you an understanding related to your budget along with debt to income ratio. It will help the lenders to evaluate your repayment capacity through the depth to income ratio. The lower ratio enhances the chance of your loan approval and allows you to consider shorter tenures if your income is quite stable and predictable. At the same time maintain an emergency fund to handle the unforeseen circumstances.

2. Understand the impact of home loan tenure on your EMI’s and interests. The home loan EMI’s are basically the summation which you will pay monthly along with both principal and interest components. It is available for shorter  as well as longer tenure as well.

You can get the EMI for shorter tenure which lasts for 10 to 15 years. You will be given both higher EMIs and lower total interest. If you are able to repay the principal amount fastly, then you can fill the EMIs within a shorter interval of time. The overall interest cost will be also reduced. For that purpose you can manage the higher monthly installments if you have a steady source of income where you can opt for short tenure to minimize the interest rates.

The longest tenure lasts for about 20 to 30 years. In the longer tenure, you will be given lower EMI’s there you can pay the amount over a longer period of time which would reduce the pressure on your monthly budgeting. Along with that a higher total interest will be charged. You can opt for a longer tenure if you do not have a steady source of income or you prefer a conservative approach towards budgeting. The longer tenure will provide you the comfort of lower monthly payments though it will cost you more money over the time.

3. Another crucial thing factor is your age as well as career prospects. If you are a young borrower then a longer tenure can be beneficial for you as it will offer you lower EMIs so that you can save, invest as well as invest in other financial irritates.. You can also make pre payments in the future to reduce the interest burden.

If you are an older borrower who are nearly in their mid to late career then you can prefer a shorter tenure. It ensures that your loan is fully repaid before your retirement. It will reduce the risk of financial burden in your post retirement phase.

4. You should not only consider your current financial situation but also look forward towards the future income projections as well as lifestyle changes. If you are anticipating a career advancement then you cannot force a longer tenure initially so that you can prepay the loan when your income grows. The lifestyle changes such as marriage, starting a family or child’s education can equally impact your finances. Therefore a flexible home loan tenure with the options of prepayment is quite crucial as it will provide you the opportunity to be adaptable in case your financial responsibilities will increase.
5. Repayment and foreclosure plays a  vital role. The prepayment option will shorten the tenure and it will reduce the total interest cost. If you are not quite certain about the long term financial stability then you can choose the tenure which allows you for a flexible prepayment option.
6. You can compare various loan offers. A slight variation in the interest rate can cause a major difference in the total interest to be paid in the longer. Therefore it is quite advisable to compare different offers.

Advantages of Shorter Loan Tenure

• When the principal amount will be repaid quickly then the interest rates will be lowered.
• You can become free from the burden of debt more quickly so that you can plan for your other aspirations.
• It will encourage the habit of better financial management.

Disadvantages of shorter loan tenures

1. The prominent drawback of shorter loan tenor is the higher monthly instalment. You might feel a burden on your current budget.
2. It offers limited flexibility. If the source of your income is not steady then the higher monthly installments can pose a challenge for you.

Advantages of Longer Loan Tenure

• It will reduce the monthly burden. When the loan repayment will be expanded over a longer period of time then it will be quite easier for an individual to manage his expenses alongside paying the debt.
• You can get lower EMI’s which will allow you to use your money for other professional or personal purpose.
• You can get flexibility. You can start with a longer tenure and then reduce it over the time when the income enhances.

Drawbacks of Longer Loan Tenure

1. Higher interest rates: Although the monthly payments are quite lower and the longer tenors but with the extended period of time, the interest rates will grow immensely.
2. Long term debt: The individual will be tied to alone for several decades then the future financial decisions can be impacted at a wider scale. It will also lead to a feeling of being burdened like long term obligations.

Steps to determine the best tenure for your budget

1. You can perform an assessment of your finances by looking at your monthly income expenses and other financial applications stop evaluate your finances, you can use some budgeting tools and apps which will create a clear picture of your cash flow. It will help you to know how which amount you have available each month which will help you to handle higher monthly installments for a shorter tenure. it will also help you to know whether you will prefer a short or long tenure.
2. You can use an EMI calculator which will allow you to simulate different scenarios. You can input various then your options with loan amounts and interest rates to see the changes in interest rates and EMI’s. Then you can compare these figures to ensure whether it aligns with your budget and financial goals.
3. You can evaluate your career trajectory and any expected changes in your income. You are confident enough that you will receive an immense hike over the time then you can prefer longer tenure initially so that you can make prepayments when your income increases. You can get lower EMI’s with long term savings on your interests.
4. You can analyse the interest rates as it is a key determinant of your total cost of your loan. If the interest rates are quite lower, then you can go for the shorter tenures as the impact of high monthly installments will be mitigated by lower interest charges. On the contrary, when you will be preparing for a higher interest rates then you can go forward with longer tenures in order to manage your monthly installments.
5. You can consult a financial advisor which will provide you for clarity about the situation. The advisor can also provide you a personalized analysis based on your financial profiles. You can then analyse the benefits as well as drawbacks of the different tenures options available.

 Conclusion

In a nutshell,  choosing the right home loan tenure is a quite crucial decision which requires consideration of your financial status as well as your future aspirations. You can opt for shorter as well as longer tenure based on the EMIs and interest costs which is preferable to you. You can assess your finances and then decide whether you want to go for shorter or longer tenure. Consider the other factors as  you can also consider it some professionals it can help you navigate through the complexities of tenures.

Therefore, the right home loan tenor is the one which makes an equilibrium between your affordability and the long term financial. Current By following the guidelines, you can make a well informed decision which aligns with your lifestyle as well as long term financial aspirations.

Read more: Top Business Magazine