15 Or 30 Years: Which Is The Ideal Home Loan Tenure?
Home loans are now considered to be the key instrument of financing a property purchase. However, the nuances of home loan often confuse the homebuyers, especially the tenure that they should choose. Some of the questions that homebuyers have on their mind are – What is the ideal tenure for the loan? Or, how interest rate and monthly installments will be impacted?
Here is how a home loan tenure can impact your finances in future:
An ideal home loan tenure
Home loan tenure is the period for which a homebuyer is bound to repay the entire loan amount with interest to the lender. The loans offered by banks comes with customised tenures starting from 15 years and going upto 30 years. Few banks also offer a tenure as low as 10 years while others lenders refrain for such short period as the profit margin for them in short term loan is less.
The impact on EMIs and interest rate
Equated monthly installments or EMIs are decided based on the tenure of your home loan. The tenure also determines the total interest amount you will be paying. Since the banks compound interest annually, the interest amount would be higher for a long-term home loan. However, the installments for a 15-year tenure would be more than what you would be paying for a loan of 30 years.
Consider this. For a Rs 50-lakh loan at an interest rate of nine per cent for 30 years, the EMI amount would be Rs 40,200, whereas, for a 15-year loan at the same interest rate and same loan amount, the EMI amount would be a little higher.
15-year loan period
30-year loan period
Rs 50, 700
Rs 40, 200
(Principal + Interest)
Looking at the above table, an excess of Rs 10,000 per month can bring down your loan tenure by 15 years and also, keep you away from the heavy interest repayment. A 15-year margin in the home loan tenure can help you save upto Rs 50 lakh (as per the example).
However, since the house mortgage is the cheapest in the Indian home loan sector, there are various other avenues where this excess of money can be invested to reap a better profit. For instance, according to current market conditions, a Systematic Investment Plan (SIP) of three years can help you earn up to 25 per cent of returns annually. Though mutual funds are subject to market risk, the lowest of interest rate is still 12 per cent, higher than the interest rate you would be paying for your home loan. Another downside of writing off your home loan early is the fact that the benefits of income tax rebate will cease to exist.
A home buyer can take the benefits of a 30-year tenure and work towards prepaying the loan in 15 years through part payment at a regular interval, assuming there is no prepayment penalty. The part payment can be used to pay off principal amount, ultimately bringing down the interest component in your installment.