Should you consider repaying your home loan till you turn 75?
Many people find it difficult to narrow down on a tenure when they want to apply for a home loan . And with a few banks increasing the maximum age limit for borrowing such loans, it gets that much more difficult.
Till the recent past, the maximum age limit for repaying a housing loan was from 60 – 65 years. A few lenders have now increased this to 75 years, giving people a longer period of time to repay what they borrow. But does it make sense to borrow for a longer tenure? We’re discussing the possible benefits and pitfalls of this below.
What it gives you – better home loan eligibility
Let’s say you’re 40 years old. If the maximum age up to which you can repay a housing loan is 60 years, you get a maximum of 20 years to repay it. Usually, lenders offer a maximum tenure of 30 years. But due to your age already being 40 years, you get only 20 years (60 – 40) to repay the borrowing.
In this case, your EMI will be on the higher side since the tenure is limited to 20 years.
Now, imagine your lender allows you to repay the loan till the age of 75 years. If it also gives you an option to extend the tenure, you can take up to 35 years (75 – 40) to repay it. This increases the eligibility of borrowers, especially retired people. For example, even a borrower who is 60 years old can take a loan and pay it off in 15 years.
But still, how feasible is this?
What you should remember – the cost of a longer tenure
Sure, the longer your tenure, the lower your EMI will be. But are you counting the cost of the loan over the longer period? Not a lot of people think of how much interest they will end up paying over a 30-year period as opposed to a 15-year period.
Let’s try and understand this better with the help of an illustration.
You want to apply for a property loan of Rs.40 lakh. The bank quotes you an interest rate of 9% p.a. for a tenure of 15 years. The processing fee is 1% of the loan amount. Your EMI based on these parameters will be Rs.40,570 (approximately). The total interest you will pay over the 15-year period will be around Rs.33 lakh.
Now, let’s say you change the tenure to 30 years. Other parameters remaining the same, your new EMI will be Rs.32,185. The total interest over this tenure will be approximately Rs.75.86 lakh.
Yes, your EMI for the 30-year period is lower than that of the 15-year tenure. But at what cost? The interest you will end up paying over 30 years is more than 2.5 times that of what you’ll pay over 15 years.
Not only that, given economic inflation and market fluctuation of the interest rates, there is no guarantee that your interest rate will stay constant at 9% p.a. It can increase, making your loan all the more expensive.
Long story short, it comes down to what you can afford. A longer loan period helps you repay the loan at a more relaxed pace. But it comes at a great cost – you pay a lot more interest and you stay in debt for a longer period.
Financial advisors usually advise borrowers to keep the tenure as short as possible while ensuring that EMIs can be paid on time as well. And since lenders now don’t charge prepayment fees on home loans with fluctuating interest rates, making prepayments can help reduce your costs further.
So, while longer tenures may make the repayment figures seem attractive, keep in mind that they may not necessarily benefit you in the long run. Keep your EMIs affordable by choosing the right tenure and repay your housing loan at the earliest.