Rather than paying money in lump sum, it becomes convenient for the salaried class to pay the equated monthly installments (EMI) that they may spare from the salary.
Buying a house is a dream for everyone, but many people are unable to fulfill this dream due to lack of fund. Moreover, taking a home loan is also not an easy task and involve the interest part, which is equivalent to the cost of house itself. However, rather than paying money in lump sum, it becomes convenient for the salaried class to pay the equated monthly installments (EMI) that they may spare from the salary. Although the borrower needs to pay back double the loan amount or even more over the loan period, but it is still a convenient way to fulfill the dream of having one’s own house.
Moreover, saving on rent by shifting into one’s own house also makes the EMI burden feel lighter.
The value of EMI depends on term of the loan. The longer the term, the higher will be the total interest, but the lower will be the EMI. Likewise, the shorter the term, the lesser will be the total interest payable, but the higher will be the EMI.
Even as the total interest payable is more, salaried people mostly opt for longer-duration loans as smaller EMI needs to be paid and as a result, a higher amount of loan may be taken.
To cash in on the sentiment, PNB Housing Finance (a subsidiary of Punjab National Bank) has started offering home loans with a tenure as long as 30 years, contrary to the conventional duration of 20 years.
According to PNBHF, apart from the 30-year tenure, other features include – doorstep service with a dedicated relationship manager, no prepayment or foreclosure charges, numerous repayment options, customised eligibility programmes, etc.
Now, let’s analyse the consequences of taking a Rs 50-lakh loan for 20 years and 30 years with an assumed interest rate of 8.5 per cent.
If you take a loan for 20 years, you have to repay a total amount of Rs 1,04,13,840, that is the total interest of Rs 54,13,840 on the loan amount of Rs 50 lakh and the EMI amount will be Rs 43,391. On the other hand, if the tenure is 30 years, you have to repay a total amount of Rs 1,38,40,560, that is the total interest of Rs 88,40,560 on the loan amount of Rs 50 lakh, but the EMI will be lower at Rs 38,446.
Although the EMI amount is lower for a 30-year term, but the interest component will be higher in the initial period than the smaller period of 20 years. Like, in case of the first installment, over 88.7 per cent of the installment amount will be interest for the 30-year loan period, while it will be over 78.6 per cent for the 20-year loan term.
Moreover, you shouldn’t take loan for a tenure that stretches beyond your earning life, so that you could finish paying EMIs out of your salary and need not touch your retirement corpus.
So, if you are young, having a lower salary and have a service period of more than 30 years, you may opt for it. Otherwise, it will be better to opt for a shorter duration, if you earn sufficient salary to pay the EMIs comfortably.