[ecis2016.org] A longer tenure home loan gives the borrower a higher home loan eligibility, along with flexibility in repayment and income tax benefits
Until a few decades ago, Indians were generally averse to taking loans to buy or construct their homes and would use their retirement funds for the same. However, with increasing urbanisation, easy availability of home loans and higher earnings of the family as a unit, this trend has changed. Now, many individuals are buying their first house even before marriage, by availing home loans.
You are reading: Home loans: Longer tenure ones are the best bet
Depending on the loan amount, your payment capacity and various other factors, you could be given a tenure typically ranging between 15 and 30 years. While the borrower is given a choice to select a tenure he is comfortable with, he will not be able to exercise that option, in case the loan amount is huge and your repayment capacity allows you only to go for a long tenure. That apart, most borrowers would like to be free from the obligation as soon as they can and given a choice, they would select the shortest tenure possible. However, this is often done without paying due attention to some crucial aspects. One should, in fact, opt for home loans, with a long tenure of up to 20 years or 30 years. Here are some of the advantages of doing so.
Longer tenure loans offer higher loan eligibility
An individual’s home loan eligibility, is determined on the basis of his/her ability to repay the home loan every month, in the form of equated monthly instalments (EMIs). This, in turn, is assessed on the basis of your disposable income. So, for a shorter home loan tenure, all things being equal, your EMI will be higher and thus, you will be eligible for a smaller home loan amount as compared to what will be available, if you opt for a longer tenure home loan. Consequently, with a longer tenure and thus, higher eligibility, you may be able to buy a bigger or better house, than what you can with a shorter tenure home loan.
Longer tenure loans have greater flexibility of repayment
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As there are no penalties on the prepayment of home loans under a floating rate of interest, you can prepay the entire outstanding or part of the home loan, if you want to sell the house or just be free from any debts.
If you have taken the home loan under a fixed rate of interest, from any housing finance company, you can still prepay the home loan without any penalty, as long as you are not borrowing from another institution.
Moreover, if your home loan is under a fixed rate of interest, you can still repay a certain percentage of your home loan outstanding every year, without any prepayment penalty. Thus, you can become debt-free earlier, while retaining the flexibility of making payments according to your cash flow.
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Income tax benefits of longer tenure loans
Section 24b of the Income Tax Act, provides benefits on the interest payment on home loans. The effective home loan rate of interest, after taking into account the tax benefit, is better than what one can earn on any other alternative investment avenue. Moreover, as there are no alternative tax benefits that are as efficient as that on home loan interests, it is advisable to avail of this benefit for as long as you can.
Section 80C also allows for a deduction of up to Rs 1.50 lakhs, for repayment of the principal component of a home loan. Nowadays, the quantum of home loan that is needed to buy a decent property, is fairly large. The principal component, in the home loan repayment, will be higher for a shorter home loan tenure, as compared to a longer-duration home loan. Consequently, a significant portion of the home loan repayment will be wasted, as you would not be able to claim the deduction under Section 80C beyond the specified limit, in case you opt for a shorter home loan tenure.
(The author is chief editor – Apnapaisa and a tax and investment expert, with 35 years’ experience)
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