Housing loans: The longer the payback period, the better

Up to a decade ago, most people believed in saving up to buy a house of their dreams. After most of the money for the house was collected, the shortfall would be met by borrowing from relatives or taking a housing loan from a bank. Today, however, the situation has reversed completely.

Real estate is extremely expensive in India today, and as gross incomes rise, more and more people are choosing to take home loans to fund the major part of the house purchase. Younger age groups, too, are opting to buy homes in their 20s so as to create a valuable asset for the future. Responding to the need for housing in the country’s metros, Tier II and III cities and upcoming towns, a multitude of Indian banks and financial institutions are offering home loans to suit customers’ needs.

But the actual housing loan procedure proves to be more complex than one initially realizes. There are several decisions to make at several levels, such as:

  • How much loan amount to apply for
  • What rate of interest and type (Fixed or floating) would be preferable
  • What tenure is better: Shorter or longer

Of these, the last question (about loan tenure) often confuses several first time home loan seekers. At first glance, a longer tenure of 20 or more years seems quite disheartening – is one supposed to remain bound to the loan for 20 years of their life? But opting for a shorter tenure has its own pitfalls, such as higher EMI payments and higher rate of interest. So how can one decide the ideal loan tenure?

Consider the following points that illustrate how a longer payback period is better:

1 Longer tenure = More affordable loan. This equation holds true from a mathematical standpoint. For example, if a loan of Rs 40 lakh is spread over a period of 20 years, as opposed to a period of 10 years at 9% rate of interest, the resulting EMI will be a lower one for the longer tenure. This means that one pays out a smaller sum of money every month from their salary. Paying a smaller sum means that the borrower does not compromise on their lifestyle or overall house expenses while repaying the loan. Ideally, the EMI should not exceed about 30% of the monthly income, so that overall budgets are not strained.

2 Longer tenure = More money repaid. Again from a mathematical standpoint, a longer tenure results in more money repaid, since the interest is charged up to the last EMI. Hence, those with a good repayment capability normally try to prepay the loan faster to avoid repaying a large amount of money. Also, they take a shorter tenure on the home loan, though this results in a higher EMI. If you do not want to repay too much money on your home loan, you can opt to prepay the loan at regular intervals. There are no prepayment charges on home loans and loans against property in India.

3 Your working age decides your loan tenure. In earlier years, banks and financial institutions would offer a home loan for a maximum payback period of 20 years. These days, however, lending institutions are extending loans for a tenure of 25 years or even 30 years. A longer home loan tenure extends the applicant’s loan eligibility as well, since financing institutions assume that the income of a person shows an upward trend as time goes on. However, your age at the time of applying for the housing loan is an important factor in this decision. If you are 35 years old, the housing finance company will not extend a loan for 30 years, assuming that you will retire by age 60. Hence the maximum tenure may be 20 years. Conversely, a 25-year-old applying for a housing loan may get a tenure of 30 years, basis a stable income and good credit score.

4 The repayment capability is an important factor. Often, the applicant’s income decides whether the financial institution will approve the loan application or not. Thus, those with erratic income patterns (such as freelance writers, for example) or with a history of quitting jobs often are not considered as good credit risks. Another factor in this regard is the choice of one’s profession: if the applicant is involved in work that puts their life in jeopardy in the line of duty (such as fire personnel, policemen, etc.) then also the application may not be approved. The housing finance institution studies the applicant’s employment history, salary and total disposable income and also the loan amount they seek. If the applicant is found to have good income, high credit score and a stable job, a longer tenure is offered.

As always, it is important to partner with a reliable housing finance institution when taking a home loan. We recommend PNB Housing Finance Limited as a one-stop solution to your housing loan needs. Not only does PNB Housing have a proven track record in extending the best home loan products to scores of satisfied customers, but it also has flexible repayment options. Its most unique feature is that it has an ‘Instant Loan in 3 minutes’ functionality. You can apply for it online and get instant approval for your home loan, as also initiate the application process.

PNB Housing Finance Limited also offers an innovative doorstep loan delivery system to save disbursal response times. This is a big plus for you if you are in a hurry to close the transaction.

Partnering with a good housing finance company also ensures that you are guided properly through the documentation process and informed about any discrepancies at the approval process itself.

Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.