Choosing the right tenure for your home loan

5 Mins Aug 23, 2022

Buying a house to live in, known as the primary home, is the dream of every family. Today, residential properties are also approached as an investment, given their potential to appreciate over time and earn a rental income. To fulfill such aspirations, various types of Home Loans are readily available.

Long-Term or Short-Term Home Loan

All you need to do is choose a Home Loan that suits you the best. Take into consideration your age, monthly, income, your existing EMIs on loans (if any), the interest paid thereon, current credit score and tenure of the Home Loan you wish to avail as these factors usually determine your Home Loan eligibility. Using anonline Home Loan Eligibility calculator would make loan planning easier for you.

It is important to be objective in your approach and not allow emotions to override your decision-making ability. Conduct thorough research i.e. pay close attention to the rate of interest, loan processing fee and read the terms and conditions carefully. Also, when you decide to avail of the Home Loan, choose your tenure carefully.

Long-term vs. Short-term Home Loan:
Home Loan tenure and interest rate are the vital deciding factors for your loan EMIs. EMIs are computed on a reducing balance method, which works in your favour as a borrower. However, do note that a shorter loan tenure increases your EMI, while a longer tenure reduces it.
The EMI on your Home Loan should be such that it makes repayments comfortable for you. To know how much your Home Loan EMI will be, use Axis Bank’s online Home Loan EMI Calculator. It will show you the break-up of the principal and the total interest amount you pay over the tenure of the Home Loan. Bear in mind, that during the initial years of your loan tenure, you pay more towards interest. Gradually, as you repay the loan, a higher portion is adjusted towards the principal component.
For a Rs. 50 lakh Home Loan at an interest of 8.00% p.a. and a tenure of 25 years, here’s how the Home Loan Amortisation Schedule works while the monthly EMI is Rs. 38,591:

Table: Amortization Schedule

Amortization Schedule

Currently, given that the Reserve Bank of India (RBI) is increasing the policy repo rate (so far hiked by 140 basis points, to 5.40% as of August 5, 2022) to tame spiralling inflation, as an effect of transmission, Home Loan interest rates would increase. In other words, this means that the EMIs payable by the Home Loan borrower would be higher, particularly the ones with shorter tenures.

In such a scenario, for comfortable payment of EMIs, it would be sensible to increase the tenure of the Home Loan, and whenever possible, prepay to reduce your debt burden.

[Read: 6 Factors to look at before you prepay your Home Loan]

Besides, it is a fact that rising interest rate cycle does not last forever. If your Home Loan is one with a floating rate of interest, you could always stand to benefit by repaying the loan sooner when the interest rates are revised downwards.
As a ground rule and from a prudent loan planning standpoint, Home Loan EMIs should not exceed 40%-50% of your net take-home-pay, so that, the loan does not prove to be a burden or impact your credit score.

[Also ReadWhat Type of Home Loan is the Best one for You?]

Tax benefits of Availing of a Home Loan:
Irrespective of the tenure, availing a Home Loan offers tax benefits. The principal repaid every financial year will entitle you to a deduction (from the Gross Total Income) of up to Rs. 1.50 lakh -- the aggregate limit -- under Section 80C of the Income Tax Act, 1961.
Further, under Section 24(b) of the Income Tax Act, the interest portion of the EMI can be claimed as a deduction up to Rs. 2 lakh if it is a Self-Occupied Property (SOP). And if is let out on rent/license fee, there isn’t any upper limit on the interest portion of the home loan you can claim as a deduction.
A Home Loan is one of the best ways to build your asset, provided you handle it sensibly. Axis Bank provides a varied range of Home loans, such as Shubh Aarambh Home Loan, Asha Home Loan, Fast Forward Home Loan, QuikPay Home Loan, Super Saver Home Loan and Power Advantage Home Loans, among others, each with distinct features -- some even allowing waiving off a certain number of EMIs -- and designed to meet the needs of every individual. Opt for one which is the best fit for you.

Disclaimer:This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.