Are you planning to purchase your dream residence using a home loan? Well, then you must have come across the dilemma of which is better – a shorter tenure or a long one. First-time homeowners are often baffled with such questions and wear themselves out in search of the right answers. However, this guide will help you decide whether you should go for a short-term housing loan or a long-term one.
Short vs. Long Home Loan Tenure: The Debate
Is there a clear winner? Let’s find out by comparing these two with the help of following parameters.
• Home loan eligibility
Your monthly repayment capacity greatly influences home loan eligibility; this, in turn, boils down to your disposable income. Hence, assuming all other things remain equal, your monthly home loan EMI will be higher if you opt for a short tenure, and will decrease as the tenure increases. That means, choosing a longer housing loan tenure will allow you to borrow a higher principal amount as compared to a shorter tenure.
Pro Tip – Before applying for home loans, check your eligibility using an online home loan calculator such as the home loan eligibility calculator.
• Home loan EMIs
At a fixed rate of interest, the EMI you need to pay for the repayment of your housing loan will keep decreasing with an increase in tenure. For example, if you take a home loan online for Rs. 50 lakhs at 10%, this is how the EMI will change in the following manner –
• Tenure = 15 years, EMI will be Rs. 53,730
• Tenure = 20 years, EMI will be Rs. 48,251
• Tenure = 25 years, EMI will be Rs. 45,435
• Tenure = 30 years, EMI will be Rs. 43,879
Use an online home loan EMI calculator to know your EMIs in advance.
• Total interest outgo
Assuming the home loan rates and other factors remain constant, the interest outgo is greater for a longer home loan tenure. For example – Consider you take a housing loan of Rs. 40 lakhs at the rate of 10% for 15 years, the interest payable on the loan will be Rs. 41,10,873. The same will be Rs. 57,90,629 for a tenure of 20 years, and it increases further to Rs. 75,94,850 for a tenure of 25 years.
Hence, a longer tenure may come in the way of other financial objectives you may have in mind.
• Income tax benefits
Sections 24B and 80C of the ITA allow tax benefits on the home loan interest and principal amount (only up to a specified limit of Rs. 1.5 lakhs) respectively. However, for a shorter home loan tenure, the principal portion will be significantly higher in the EMIs, thus, restricting the amount you can claim for deduction under Section 80C. Moreover, the effective home loan interest rate after availing tax benefits is better than other investment avenues and hence, must be availed for a longer period.
As far as the debate of which is better, short or long tenure - there is no clear winner. It all comes down to your unique preferences and requirements. How? If you’re planning on buying a house that is bigger and more expensive, you can apply for home loan with a longer tenure. Similarly, if you wish to reduce your monthly outflow, choose a longer tenure. But, if you want to close your loan sooner and avoid higher interest outgo, opt for a shorter tenure.
Want to avail easy home loans? Make sure you know the ins and outs of it – use an EMI calculator for home loan and adjust the tenure and choose the one you are most comfortable with, in terms of affordability and interest outgo.