Deciding the right repayment tenure is important a factor a factor as choosing the right rate of interest to suit your requirements. The repayment tenure in a home loan is a critical factor since the long period involved will substantially increase the total cost of the property being bought with the loan. The fluctuations in the interest rates will have a significant impact on what the customer ultimately shells out towards the house unless the right tenure is decided at the time of availing the loan. There some essential factors which must be considered carefully while deciding on the repayment tenure of a home loan.
The Age Factor:
Age comes into play in deciding home loan tenure as the banks are able to longer periods for people who are young as they have adequate earning period. Some one who is in his twenties can have a repayment period of a maximum of 20 years which shall give him adequate leverage in the monthly installments especially in the early days when the income is likely to be lesser. Another aspect of age in hand is that in case the interest rate foes up higher in between the repayment tenure can be extended which will not be possible for people who are approaching their retirement age. For people in their thirties who are well settled in their earnings taking a shorter tenure is advantageous as their incomes are higher and likely to increase subsequently so they can afford higher EMIs and thereby save on total interest paid in the long run.
Interest Fluctuation:
While deciding on the right tenure must also bear in mind that the interest rates may increase in the intervening period which will necessitate them to either pay higher Emi or increase the tenure. Thus some amount of breathing space must be allowed in the total repayment period being agreed upon while taking the loan. These fluctuations are possible in case of fixed loans also when the base rate itself changes the banks will have to adjust the interest in case of fixed type of home loans too.
EMI Factor:
The tenure of a home loan decides the monthly EMI that the borrower has to pay for a long time in the future. Thus the right tenure should be such that the borrower is able to pay off the EMIs without having to default in between. Additionally the EMI being worked out on basis of the chosen tenure must have some leverage to be enhanced in case the rates go up so as to avoid taking the option of increase in tenure which shall imply huge increase in the total interest paid for the borrower.
Two Cases
Increase in Repayment Tenure
| Original Loan | Increased tenure from 20 to 25 years | |
| Interest rate | 9% | 12% |
| EMI | Rs. 26, 992 | Rs. 31, 597 |
Increase in EMI
| Original Loan | Increased EMI | |
| Interest rate | 9% | 12% |
| EMI | Rs. 26, 992 | Rs. 33, 033 |
If one has to calculate the actual increase in total cost of the property when the tenure is increased after the loan has been sanctioned there will be a huge difference when compared to increased EMI. Thus while deciding the tenure of repayment of the home loan the borrower has to take a informed and well researched decision in order to cater for future fluctuations in interest rates as well as the repayment capacity in the years to come.