In recent times, as the rate of inflation has touched double-digit figure choosing the right home loan tenure becomes even more important as interest rates show signs of going up further.
There are several factors to be considered when one decides to take a home loan for a specific period.
Is age on your side?
The first important factor is the age. The younger the age, higher is the tenure available to a home loan borrower. This means, if one decides to take a loan in her/his 30s, s/he can get a loan for 20 years -- the maximum loan tenure offered by most Indian banks currently.
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Some banks offer home loans for 25 years but that is an exception rather than the rule. According to the eligibility criteria of the banks, age of retirement is 60 years in case of salaried and 65 years in case of self-employed individuals.
Interest rates: Beware of ups and downs
When taking a loan, one must take into account the fact that interest rates fluctuate during the loan tenure. You just have to consider the interest rate movement on home loans in the last eight years to understand how fluctuating these rates have been.
The fluctuation will impact the home loan EMI (the amount of money you pay every month to your lender), whether one takes a loan at a fixed interest rate or floating interest rate.
Why age is important
If the loan borrower is younger, s/he can get an extension in her/his loan tenure. Remember that some banks offer maximum loan tenure of 25 years. If the loan borrower is in her/his 40s, the only option available in such a case would be to increase the EMI. And this can cause a lot of pain especially in times of soaring inflation.
But this is easier said than done. The reason is, by the time you are in your 40s, the rate of increase in potential income is much lesser as compared to what one can expect at a younger age, say in mid 20s or early 30s.
Another benefit of a younger age is the increased loan eligibility. Even though the current income is taken into account while giving a loan, the potential of increase in salary is also taken as a factor. So, one can easily opt for a top-up loan (a loan on top of an already existing loan) to meet personal needs or take care of an increased EMI if at all a borrower faces such a situation.
There are repayment options such as step-up repayment facility where the EMI is low in the initial period and increases at a later stage. This actually coincides with an increase in salary of a salaried borrower. This could be ideal for young borrowers who are climbing rungs professionally. But this is an option available for the younger lot.
How it makes a difference!
Let's take an example. A 30-year old individual, say Amit, takes a home loan of Rs 30 lakh at an interest rate of 9 per cent for 20 years say in 2006. Amit earns about Rs 50, 000 per month then. Now let's assume that the interest rate on Amit's home loan increases to 11 per cent in 2008. Since Amit is 30 years old, he has an option of increasing the loan tenure to 25 years (even after increasing the loan tenure to 25 years Amit is still below his retirement age of 60 years as mentioned above).
Also, let's assume that by the time in 2008 interest rates increase Amit's salary has also increased to Rs 77, 140 assuming he got an annual salary increment of 7 per cent year-on-year in his net salary.
Impact of changed rates with the tenure increase option
As the table below shows in the five years since 2003 Amit's EMI has increased by Rs 4,605 in 2008. This is an annual increase of Rs 921 every year. This may not pinch much when prices are down but when inflation is around 11 per cent (as the figures for the week ending June 7 showed) then it sure pains a lot.
|
EMI increase if Amit increases his tenure |
Situation in 2003 |
Situation in 2008 if the tenure is increased to 25 years |
|
Interest rate |
9 per cent |
12 per cent |
|
EMI on a Rs 30 lakh loan |
Rs 26, 992 |
Rs 31, 597 |
Now let's see the calculations if Amit were in his 40s. In this case the option of increasing the loan tenure would not be available as adding 25 years would take Amit beyond the eligible age of 60 years. The only option then would be to increase his home loan EMI.
Impact of changed rates if the EMI is increased
|
EMI increase if Amit were in his 40s |
Situation in 2003 |
Situation in 2008 if the EMI is increased |
|
Interest rate |
9 per cent |
12 per cent |
|
EMI |
Rs 26, 992 |
Rs 33, 033 |
As seen above Amit's monthly outgoing in 2008 would be Rs 6,041 more than what he paid in 2003, a whopping increase of 22 per cent in five years. This shows how important it is to consider your own age as well as the tenure of the loan while planning to buy your dream home.
Apnaloan.com, an online guide for retail loan seekers. Apnaloan also enables loan consumers get best rates by making banks compete for their loan.
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