Servicing a home loan is a high value and long-term financial commitment. Therefore, it requires a lot of financial planning and discipline from the borrower to service the home loan EMIs and manage other financial commitments regularly.
On the one hand, a home loan enables young prospective homebuyers to purchase their own home as well as brings certain benefits in income tax.
On the other hand, a homebuyer should analyze and understand the various charges associated with a home loan as it is a high value loan and ensure he gets a good deal. The total cost of the loan include direct costs such as interest and indirect costs such as the onetime processing fee, administration fee, legal fee etc.
Impact of tenure
Arriving at the tenure of a home loan is very important as it is one of the key factors that make up the total cost of the loan. Many aspects are linked to the tenure of a home loan. The tenure of a home loan has an inverse relationship with the monthly installment amount. The longer tenures mean lower EMIs while the shorter tenures mean higher EMIs. Analysts suggest that a homebuyer should take a conservative approach and keep the EMIs a bit lower than the level he is comfortable paying after considering his visible monthly expenses and factoring in contingencies. It is important to note that a large portion of the initial EMI payments of a longer tenure loan goes towards the interest component. Therefore, the longer tenure loans come with a higher total cost due to the higher interest payments. These loans have lower EMIs and therefore they increase the loan eligibility of the borrower and enable him to get a higher amount. However, very long tenure loans (20 to 25 years) are only available for borrowers young in age. Most banks have a slightly lower interest rate for shorter duration loans and vice versa. The logic of offering a lower rate of interest lies in the fact that a long tenure loan means a slightly higher degree of risk for the bank. Therefore, this additional risk is factored in by offering a higher rate of interest on a longer tenure loan. It is quite obvious that the total cost of a loan is lower on the shorter duration loans. However, there are several significant factors that need to be considered while choosing the tenure of a home loan, and also the bank from which to borrow. Property outlook
Analysts say the current market conditions are quite good for those looking at investing in a property, especially for self occupation. The property prices are attractive and home loan interest rates are on a downward trajectory due to the softer monetary policy stance adopted by the Reserve Bank of India (RBI) recently. The table shows the total EMI outgo (interest and principal repayments) on a loan amount of Rs 50 lakhs for a tenure of 20 years at 11 percent interest per annum. It is assumed that the borrower is in the 30 percent income tax bracket.