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Home loan for 15 years or 25 years? Comparison made easy with calculations

By keeping a longer time period of home loan, the EMIs are lower compared to the EMIs in the case of a shorter-tenure loan.

Home loan tenure long or short, home loan, 30-year home loan, EMIs, repo linked lending rate, RLLR
Choosing shorter or longer tenure of home loan should be based on your affordability but ideally go for a shorter tenure.

Should you take a 15-year home loan or a 25-year loan? There are home loans which can be repaid over 30 years as well. So, should you take a 15-year loan or a 30-year home loan? At the time of finalizing the home loan, many of us are often confused about the home loan tenure – long or short. By keeping a longer time period of home loan, the EMIs are lower compared to the EMIs in the case of a shorter-tenure loan. But, is this one parameter enough to take the decision or there are other factors as well?

The need for a home loan arises generally after you have decided on the residential property or the abode that will be your own home soon. The chase to arrange for the funds begin. You redeem some of your investments earmarked for buying home and still if the gap exists, you look forward to taking a home loan.

To find out whether a shorter tenure loan is better or longer tenure, we assume the following:

Loan Amount – Rs 35 lakh
Tenure – 15 years and 25 years
Home loan interest rate – 8.75 per cent ( assuming it remains same)

Case I: Rs 35 lakh loan for 15 years (180 months)
EMI: Rs 34,981
Total interest paid: Rs 27,96,526

This means, on a Rs 35 lakh, the borrower will pay total interest of nearly Rs 28 lakh in 15 years.

Case II: Rs 35 lakh loan for 25 years (300 months)
EMI: Rs 34,981
Total interest paid: Rs 51,32,508

This means, on a Rs 35 lakh, the borrower will pay total interest of nearly Rs 51 lakh in 25 years.

The Results:

  • Savings in EMI by choosing a longer tenure – Rs 6,206
  • Savings in interest by choosing a shorter tenure – Rs 23,35,982

Therefore, it can be clearly seen that lesser the tenure, more the EMI but lesser is the interest cost. And, on the contrary by choosing a longer tenure, the EMI burden is less but the interest cost is high.

Here’s another twist to the calculations. Lets us say someone opts for Case II and goes for lower EMI. If the monthly difference of Rs 6,000 is invested at an assumed growth rate of 12 per cent per annum for 25 years, the accumulated corpus is about Rs 1.1 crore.

Since October 1, 2019, all loans from banks are linked to an external benchmark. Most banks have opted for the RBI repo rate as their external benchmark and therefore, home loans are based on the bank’s repo linked lending rate (RLLR). After a comparison of effective home loan interest rate across banks, an important parameter is the tenure of the home loan.

WATCH VIDEO: What is Repo Linked Lending Rate, Home Loan? RLLR meaning, comparison vs MCLR

No matter whether you choose a shorter tenure or a longer tenure, it is better to finish the home loan as early as possible. Ideally, as one grows in the career, the prepaying capacity increases.

Choosing shorter or longer tenure of home loan should be based on your affordability but ideally, go for a shorter tenure. Also, the early you prepay your home loan, the better it is for your savings earmarked for other financial goals in life.

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