The dream of almost every Indian middle class individual is to own their own home. And this dream is coming true thanks to the availability of easy Home Loans. However, up until a few decades ago, many Indians were sceptical about taking loans whether for constructing a new house or purchasing a new apartment. It was only recently, that the trend has changed as more and more individuals are opting for loans to get rid of their financial crunch, or even to finance their holidays.
Most individuals with a stable job are buying a home even before they cross their 30s. In an attempt to get the best Home Loan deals, most individuals opt for a short tenure Home Loan in order to become debt-free quickly and reduce interest payouts. While opting for a short term Home Loan has its own set of advantages, the benefits are more when you opt for a longer tenure. Home Loan requirements differ from one lender to the other, and it’s easier to get a loan request approved when it’s for a longer tenure. Apart from that, a Home Loan with a long tenure of 20-30 years offers the following advantages:
Higher Loan Eligibility
In order to avail a Home Loan, first and foremost you need to be eligible for the same. Your eligibility largely depends on your net monthly income among many other home loan eligibility criteria. You repay the loan in the form of EMIs or equated monthly instalments, which of course depends on your disposable income.
Keeping everything same, when you opt for a shorter tenure, you need to pay a higher EMI. It’s obvious that you’ll be eligible for a higher loan amount when you opt for a longer tenure as the EMI will lesser and more affordable in terms of your income.
So, if your finances are forcing you to look at a smaller house, and are making you compromise on your dream of purchasing a bigger and better house, thinking you wouldn’t be able afford it, then consider a longer tenure loan as it gives you a high loan eligibility.
Eligibility For Other Loans
When you pay a low EMI, you’ll be eligible to apply for other loans by virtue of the lower debt service ratio—the percentage of income being used for debt payment to the percentage left for other household expenditure and saving. Consider Home Loan interest calculation to reveal the EMI you’ll need to pay every month when availing another loan to ensure you can afford it.
All lenders and NBFCs look at your credit score and debt service ratio before approving your loan request. When you pay a low EMI, it’s easier to maintain a good credit score and this along with a low debt service ratio makes you eligible for other loans.
It’s natural to face an initial cash crunch after taking a Home Loan, as you’ve probably used up all your savings to pay the margin money. Availing a Personal Loan during this time can ease up your finances to a great extent.
Flexibility in Repayment
When you avail a Home Loan under a floating interest rate, then you don’t have to bear prepayment penalties and you can foreclose the loan by repaying the entire outstanding balance or make a part payment toward it. In case of fixed rate Home Loan, you’re allowed to prepay only a certain percentage of your loan every year.
However, it’s best to look for lenders who don’t charge prepayment penalties even under a fixed rate Home Loan scheme. You can clear-off your debt earlier, and make payments (apart from the regular EMIs) based on your cash flows.
Income Tax Benefits
Section 24b of the Income Tax Law offers benefits on interests paid in Home Loans. Keeping the benefits in mind, the effective Home Loan interest rate is much better compared to any other interest avenue. No alternative tax benefits are as lucrative as on Home Loan, and so when you opt for a longer tenure Home Loan, you can avail this benefit for a longer period of time.
Also under section 80C of the Income Tax Law, there is a deduction of up to Rs.1.50 lakh in case of repayment of the entire principal component of the Home Loan. Needless to say, apartments don’t come cheap and the amount of money (loan amount) you need to purchase is quite high. The principal component of your Home Loan will be higher in case of short tenure loans. This means a significant amount of the repayment will get wasted, unless, of course if you don’t apply for a long tenure Home Loan, as you can’t avail deduction beyond the specified limit under this law.
Considering the present date inflation rate and value of money, the amount you pay during later years will have lesser value which means you’ll be making a profit. Ideally, you’ll also be earning more after 10 years than what you’re earning now and considering you keep paying the same EMI, you’ll actually be paying less in terms of monetary value.
There are many lenders and NBFCs offering Home Loans, and it’s advisable to make a thorough comparison of the various schemes being offered by various lenders. You already have a fair idea of what benefits a longer tenure Home Loan offers. Simply put, it’ll be easier for you to manage your finances when you opt for Home Loans for longer tenures.