When it comes to the world of home loans, borrowers are faced with an array of decisions that can shape their financial future. One particularly pivotal choice is selecting the tenor of the loan. In recent years, home loans with longer tenors have been making waves.
The latest one is from Bajaj Housing Finance where borrowers are being offered extended repayment periods of up to 40 years, compared to the typical 25-30 years.
It might sound enticing to have more time to repay your loan, but is it truly worth it? Before diving into the deep end, borrowers should take a step back and carefully weigh the pros and cons of opting for a longer tenor. Let's dive into the basics and explore both the sunny side and the shadowy side of this decision.
What does loan tenor mean?
The home loan tenor refers to the duration or length of time over which a borrower agrees to repay the loan amount to the lender. It is the period within which the borrower is expected to fulfill the loan obligations, including the payment of principal and interest.
The choice of home loan tenor has a direct impact on the Equated Monthly Installment (EMI) amount, with longer tenors resulting in lower EMIs but higher interest costs over the life of the loan. Shorter tenors, on the other hand, lead to higher EMIs but lower overall interest expenses and quicker debt repayment.
What are the benefits of opting for a longer home tenor?
One of the primary advantages of a longer tenor is the reduced financial burden. Lower EMIs provide borrowers with much-needed breathing space, allowing them to manage their monthly budget more comfortably.
Commenting on the same, Atul Monga, Founder and CEO of Basic Home Loan said, “With a longer tenure, borrowers can potentially qualify for a higher loan amount. This can be beneficial when purchasing a more expensive property or when additional funds are required for home improvements or renovations.”
“Home loan borrowers who opt for long tenors benefit from the potential impact of inflation. As inflation rises over time, the value of money decreases, which means that the fixed EMI amount becomes relatively smaller in real terms,” he added.
According to Viral Bhatt, Founder of Money Mantra, “A longer tenor also gives borrowers more time to repay the loan. This can be helpful if you are not sure how much you can afford to pay each month or if you expect your income to increase in the future. In some cases, lenders may offer lower interest rates on home loans with longer tenors. This is because they are taking on more risk by lending you money for a longer period of time.”
What are the potential downsides of a longer loan tenor?
Opting for a longer tenor means being in debt for a more extended period. It is important to carefully assess the financial situation and future prospects to determine if the borrowers are comfortable carrying the debt load over such a long duration.
Adding his views, Viral said “Even though your EMIs will be lower, you will end up paying more interest over the life of the loan if you take a longer tenor. This is because you will be paying interest on the loan for a longer period of time.”
“Furthermore, if your income decreases or you experience other financial difficulties, it may be more difficult to afford the higher EMIs of a shorter-tenor loan. This could lead to you defaulting on the loan,” he added.
In some cases, opting for a longer tenor may impact your creditworthiness. Lenders consider the outstanding debt and repayment duration when assessing creditworthiness. Borrowers with a longer tenor loan may find it challenging to avail additional credit facilities in the future, as lenders may perceive them as having a higher debt burden.
What should borrowers do?
Viral offered some questions to ask yourself when deciding whether or not to take a home loan with a longer tenor- Can you afford the higher EMIs of a shorter-tenor loan? Do you have other debts that you need to pay off? Do you have enough savings to cover an unexpected expense? Do you plan to have children or start a business in the near future?
“When deciding on the loan tenure, it's essential to consider your financial goals, long-term plans, and overall affordability. While a longer tenure may offer short-term benefits, it's crucial to evaluate the total interest costs and determine the most suitable option based on your financial situation,” Atul added.
When in doubt about whether a longer tenor loan suits your needs, seeking advice from a financial advisor is a wise step to take. Engaging with a financial professional enables you to evaluate your financial circumstances thoroughly and obtain personalized recommendations.