Before selecting the tenure of a home loan, use a home loan total cost calculator to know the impact on your EMI and interest cost.
Moving into one’s own house is a dream for most tenants who are paying rent to their landlord. With the home loan interest rates at a multi-year low of around 7 per cent, financing a home is gaining traction among many tenants. After arranging a few lakhs as the down payment amount, approaching a bank or housing finance company (HFC) is all that you need to do to own a home of your own.
The amount of home loan that most lenders provide will be around 50 per cent of your take-home monthly pay. You may show your spouse’s income to enhance your eligibility as well. With most lenders, the actual interest rate applicable to you will depend on your profession, income, gender, credit score etc. One other factor that you need to fix is the tenure of the loan. Many banks provide a home loan for a duration of up to 30 years. But, should you choose a 15-year tenure or a 30-year tenure? Let’s explore.
Difference in Home Loan EMI
The longer the tenure you choose, the lower will be the EMI. A lower EMI looks easier to service without impacting the household budget. Most tenants will want to keep the EMI closer to the rent that they are already paying to their landlord. But if one wants to close the home loan in a few years time, for them the EMI will be on the higher side for the same amount of loan. Illustratively, on a home loan of Rs 35 lakh at 7 per cent, the EMI for 15 years will be Rs 31,459 while for a 30-year loan, the EMI will be Rs 23,286, a difference of nearly 26 per cent.
Loan Amount: Rs 35 lakh
EMI – 15 Years: Rs 31459
EMI – 30 Years: Rs 23286
Interest paid: Rs 21.62 lakh ( Over 15 – years)
Interest paid: Rs 49 lakh ( Over 30 – years)
Saving in EMI by opting for 30-year tenure : Rs 8173 ( Annual savings of approx Rs 1 lakh)
Saving in Interest by opting for 15-year: Rs 27 lakh ( Annual savings of approx Rs 1 lakh)
Difference in Interest Paid
The total interest that you will end up paying out of the EMI will depend on the tenure you choose. The longer the tenure you choose, the higher will be the interest burden. On a Rs 35 lakh loan, the total interest will be nearly Rs 21.62 lakh over 15-years, while it will be almost Rs 49 lakh for a 30-year tenure. On a Rs 35 lakh home loan, the total interest cost will be almost Rs 49 lakh!
So, before you finalize 15-year or 20-year or a 30- year home loan, evaluate the factors impacting your EMI and interest cost. Using a home loan total cost calculator will help you determine the best home loan option for you.
What to do
The EMI will remain the same till the end of loan tenure and servicing it may become easier as one sees the income grow over the years. Choose the tenure accordingly. The savings in EMI may also be invested as and when there is investible surplus. However, the objective should be to complete the loan as early as possible so as to keep interest cost low. A longer tenure helps to keep the EMI lower but interest cost will be huge. In case, you have to opt for it, keep prepaying the loan by making a balloon or lump sum payment at regular intervals so as to complete the loan as early as possible.