Buying a home is a very important decision and so is finding the right home loan. You spend months comparing and choosing the right locality, better builders and the set of amenities offered with the house. But do you really spend enough time in finding the right type of home loan? There are numerous banks and financial institutions ready to offer you loans, each with terms and conditions more attractive than the other. But before you compare the lenders, there is another important choice that you need to make which is whether you should get a short-term home loan or long-term home loan.
As the readers will deduce, short-term and long-term loans differ in terms of their tenures. Loans taken for a period of less than 10 years are categorized as short-term and those taken for tenure of 20-25 years are termed as long-term. Majority of the borrowers opt for a long-term loan as it entails lesser EMIs. However, there are some other factors that need to be taken into consideration before deciding the home loan tenure.
Age of the Borrower
Age is one of the most important concerns while deciding the tenure of your home loan. The ground rule is- “Higher the age, shorter the tenure”. The reason is quite simple. If you are in your 20s, you would have completed the first few years of you career and it is safe to take a long-term home loan because as you reach your mid-30s, you will be left with just a few EMIs to pay. A longer tenure also means lesser EMIs leaving enough room for you invest in other plans. Even if you are in your 30s while taking the loan, long-term is a safe bet because if you pay the EMIs regularly and don’t opt for a home loan extension, you will be done with the debt much before retirement.
But it is not a good idea to take a long-term home loan when in the late-40s or 50s as one is close to retirement. An increase in the interest rates (in case of floating rates) will make EMIs bigger which will be harder to pay after retirement as you will not have a regular source of income.
Income of the Borrower
Needless to say, your income determines all financial transactions in your life. You must also plan and prioritize your expenses before finalizing the home loan tenure. A shorter tenure means higher EMI expense per month and vice-versa. Going for a short-term loan ‘over-enthusiastically’ is a common mistake made by the borrowers. If you take Rs 30 Lakh home loan at 12% for 20 years, your monthly EMI will be Rs 33,033. But if the same loan is taken for 10 years, the EMI will be Rs 43,041. An extra expense of Rs 10,000 will be added to your monthly expenditure.
While it is better to get rid of the debt early, you must not side-line emergency expenses from your plan. Higher EMI is a huge risk for middle-class families with single source of income. And to add to that, if interest rates increase, the situation will turn into a nightmare. So, it is extremely important to plan your future expenses in advance and also factor-in unexpected expenditures.
Purpose of Buying the House
EMI has two components- Principal and Interest. Here, it is important to understand that a shorter tenure entails lesser amount to be paid as interest and long-term home loan means that you will be paying higher amount as interests. In the above example, the total amount of interest paid in case of a 20-year loan will be Rs 49,27,820 while the interest paid in case of a 10-year loan will be Rs 21,64,954. There is a difference of Rs 27,82,866, which is huge! So, if you are buying the property to sell and earn profit, short-term home loan is a wiser bet.
If you are still confused between the two, it is better to go for a long-term home loan along with prepayment options.