Choosing the right home loan tenure is crucial to ensure that financial situation of the borrower remains stable throughout the repayment period. This is more important at a time when borrowers are already reeling under the pressure of lengthening loan tenures and rising interest rates due to Reserve Bank of India's (RBI's) repo rate hikes. Before hitting the pause button on this hike for the second time in its last policy, the central bank raised the repo rate cumulatively by 250 basis points since May 2022.
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For most banks, the external benchmark to which their home loans are linked is the repo rate. So, with the hike in repo rate, all existing home loans on floating rates of interest became expensive.
Currently, the repo rate stands at 6.5 percent. This is the second incidence when the RBI paused the rate. This is good news for home loan borrowers as it signals that interest rates are stabilising. However, the best is yet to come when RBI starts cutting the rate.
So, how can borrowers choose right home loan?
Let's look at some of the factors:
Consider income and expenses
The most important factor in determining home loan tenure is the ability to afford the monthly EMIs.
"The income will dictate how much one can afford to pay each month and the expenses will determine how much he/she will have left over after paying for necessities like food, housing and transportation. If the borrower has a high income and low expense, he/she may be able to afford a shorter tenure with higher EMIs. However, if the borrower has a lower income or higher expense, he/she may need to choose a longer tenure with lower EMIs," said Pramod Kathuria, Founder & CEO at Easiloan.
Think about retirement goals
When borrowers take a home loan, they are essentially taking on debt that they will have to repay over time. This means that they will have less money available to save for retirement.
"If borrowers are planning to retire early, they may want to choose a shorter tenure so that they can pay off the debt sooner and start saving more for retirement," Kathuria told CNBC-TV18.com.
Also, consider long-term financial goals
Borrowers should check how home loan fits into their overall financial plan.
"Whether it's early retirement or upcoming major expenses, such factors will influence the tenor they choose. To get an estimate of the monthly equated monthly installment (EMI) for different loan tenure, borrowers can utilise online home loan EMI calculators. They can adjust the tenure until they find an EMI that aligns with their budget," said Kamaljeet Rastogi, Chief Executive Officer, SahiBnk, Powered by Manipal Business Solutions.
Factor in the interest rate
The interest rate on the home loan will also affect the amount of money borrowers pay in total over the life of the loan.
"A higher interest rate will mean that borrowers pay more in interest over time, so they may want to choose a shorter tenure to save money on interest," Kathuria said.
Compare different loan options
There are many different home loan options available, so it is important to compare different loan terms and interest rates before making a decision.
"Borrowers can use a home loan calculator to compare different options and see how much they will have to pay in total over the life of the loan.
Plan for contingencies
Borrowers should also anticipate potential changes in their financial situation, such as job changes, future expenses, or unforeseen circumstances.
"Choose a tenure that provides flexibility and allows to handle such situations without significant stress," Rastogi told CNBC-TV18.com.
(Edited by : Shoma Bhattacharjee)
First Published: Jun 13, 2023 7:12 PM IST
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