Home loans are becoming increasingly popular. Home loans are low-interest rate loans that homebuyers can avail of to facilitate their property purchase. Lenders take a risk when they sanction a loan and to make up for this risk, they charge interest on the loan principal. The agreement in the case of home loans is that the home loan borrower will repay the principal amount along with interest over an agreed-upon time known as the loan tenor. Borrowers planning to avail of a home loan must choose their loan tenor carefully.

A long tenor makes home loans pocket-friendly and home loan EMIs affordable but it also considerably increases the cost of borrowing the loan. A short home loan tenor, on the other hand, reduces the cost of borrowing and may even help one avail of a low home loan interest rate deal but it can considerably increase the burden of loan repayment by making one’s loan EMIs unaffordable. In his article, we share with our readers some tips on how to select the right loan tenor.

Tips to Select the Right Loan Repayment Tenor:

1. Keep Your Income in Mind While Deciding Your Loan Tenor

When deciding the loan tenor that would be right for you, the first thing you must keep in mind is your income and your debt-to-income ratio. Your income will determine what EMI can you afford and your debt-to-income ratio will determine the loan amount and loan tenor you will be able to get to repay your loan. The debt-to-income ratio tells a lender the percentage of your total income going towards repaying debt. Lenders do not lend money to borrowers whose debt-to-income ratio exceeds 40% of their income.

Let us understand this with an example. Let us assume your monthly income is Rs.1 Lakh and you pay car loan EMIs worth Rs.10,000 and personal loan EMIs worth Rs.5000. In this case, your debt-to-income ratio is 15%, which is quite low. Lenders easily lend money to borrowers whose debt-to-income ratio does not exceed 40% of their total income.

If your debt-to-income ratio is already low, you can afford to pay a higher EMI and keep your loan tenor short. However, if your debt-to-income ratio is already near 30%, you must keep your loan EMIs low and your loan tenor long to increase your chances of getting approved for a loan and availing it on good loan terms and conditions.

2. Keep Your Age in Mind While Deciding Your Loan Tenor

Housing loan eligibility requirements vary from lender to lender. However, most lenders require borrowers to be between 23 and 65 years of age at the time of loan maturity. The maximum age is always the age of the borrower at the time of loan maturity. Thus, given the eligibility requirements surrounding age, home loan borrowers in their late 40s and early 50s cannot opt for a long home loan tenor. It is thus that people are advised to take the plunge and buy a home in their late 20s and early 30s as this allows them to avail of a long tenor on their home loan and repay their home loan easily, without feeling burdened or stressed.

3. Decide Your Loan Tenor Keeping in Mind Your Future Income and Income Hikes

Your income will not remain the same forever. If all goes well and as planned, you will earn way more than you are earning right now in the years to come. You will also use bonuses, which you can use for prepayments. Home loan borrowers must decide their loan tenor keeping the future increase in their income or future income hikes in mind. Borrowers must remember that if they match any increase in their income with an increase in their EMI, they will be able to become debt-free quite quickly. However, doing so would require one to practice rigorous financial discipline and learn to compromise on one’s desires occasionally.

Final Words

Home loans are of three different types: short-term loans, medium-term home loans, and long-term loans. Every home loan borrower wants to keep their loan tenor short and become debt-free as quickly as possible. However, keeping the loan tenor short may not always be the smartest move. One should decide their loan tenor keeping in mind their age, income, current obligations, city of residence, etc.

Homebuyers planning to avail of a home loan must use a home loan EMI calculator to figure out the right loan tenor for them. The EMI calculator is an online handy tool that borrowers or home loan applicants can use to help them figure out the right loan tenor for them. The calculator asks home loan borrowers to share three things: desired loan amount, desired loan tenor, and the rate of interest being offered.

As soon as a borrower enters these three values, the calculator gives them their tentative EMIs as well as the total interest outgo on the loan. If borrowers are comfortable paying the loan EMIs they see on their screen, they can go ahead and apply for a home loan. However, if the EMIs seem too high or unaffordable, the user can change the loan tenor and opt for a longer tenor to help them bring their EMIs into the affordable range. Home loan EMI calculators are easily available on the internet these days and one can use them for free at any time and from anywhere.