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While going in for a home loan, it is of utmost importance to choose the right tenure.
There are some restrictions imposed by banks, primarily depending on the age of the borrower. Generally, banks prefer to restrict the maximum tenure to the retirement age of the borrower.
Interest cost
Given this cap, you can opt for a shorter duration, depending on various factors. Most borrowers want to borrow for a longer period of time rather than a short term. The equated monthly instalment (EMI) amount is dependent on the tenure of the loan and amount, apart from rate of interest. As the amount borrowed to buy a home is mostly high, a longer duration brings down the EMI amount. Simultaneously, it also entails a higher overall interest cost. Shorter the loan tenure, higher the EMI, but the overall interest cost is lower.
Expected income
One important factor to be considered is your income, especially the net disposable income, if it is from this part of the income that you will repay the loan instalments.
In case the net disposable income is low, it is advisable to go in for a longer tenure loan rather than opting for a short tenure one. This way, the EMI amount is reduced because the loan repayment is spread over a longer period of time. The immediate burden on the borrower is low. However, you will have to pay interest over an extended period.
Loan amount
Another point to be considered is the total amount of loan. The amount borrowed determines whether you should opt for a longer tenure or shorter one. In case the amount borrowed is high, you can go in for a longer tenure. A smaller loan may be optimal for a short duration.
Interest rate
Yet another important factor is the interest rate. A short tenure loan attracts a lower rate of interest as compared to a long tenure one. This is because the bank can estimate the near term interest rates more accurately as compared to a long-term horizon. In case you have some disposable funds every month to repay the loan earlier, you can opt for a shorter tenure and take advantage of the lower interest rate.
Expected expenses
You should also consider your present as well as future income streams. In case you are expecting an increase or reduction in your income level, you have to decide on the tenure accordingly. For example, in case a person is going to retire in 10 years' time, a maximum tenure of 10 years is advisable. One may not like to take it beyond the retirement age. A 25-year-old may opt for a 30-year tenure. Similarly, you need to consider the present as well as expected expenditure in future.
For example, a 25-year-old may have a present income of Rs 5 lakhs per annum and expenses of Rs 2 lakhs, leaving a net disposable income of Rs 3 lakhs per annum. This means, he can easily afford an EMI of Rs 25,000 per month. Assuming after 10 years his income will increase to Rs 10 lakhs while his expenses will rise to Rs 6 lakhs, he will end up with a net disposable income of Rs 4 lakhs per annum. So, he can afford a higher EMI after five years.
Also, you can add the income of your spouse, and work out a suitable fund structure which can be used to decide on the tenure of the loan.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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