On home loans- Relationship between tenure and EMI ::Business Line

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Relationship between tenure and EMI

I want to take a home loan for Rs 25 lakh, one year down the line. What is the maximum duration for a home loan, and should I opt for the maximum duration? Please explain the benefits and EMI comparisons. — Mahesh Kannan

Home loans are generally available for a maximum loan tenure of 20 years. However, availing the maximum loan tenure is dependent on the age at which you take the loan. In general, the shorter the tenure, the lesser the interest you pay to the bank. This means a 10-year tenure loan will have a lesser total loan cost when compared to a 20-year loan tenure for a particular loan amount and interest rate. However, remember to factor in processing fee and some other miscellaneous charges when comparing across different banks.

However on the down side, a shorter tenure would mean a higher EMI outgo every month. So, if you need a Rs 25-lakh loan, which is given to you at, say, a 10 per cent interest rate per annum, your EMI for a 10-year loan tenure would work out to approximately Rs 33,000, and Rs 23,000 for a 20-year tenure. Even if you choose a longer tenure, you always have the choice of prepaying your loan before the tenure ends, thus saving your interest outgo significantly. You need to evaluate this after factoring in the prepayment penalty charges of your bank. You can calculate your costs with accuracy factoring in prepayment, as well by utilising an online EMI calculator.

I got a home loan 5 years ago from SBI; then I took a top-up loan on that. I also took a car loan from that bank. My question is this: Can I get one more home loan from SBI or some other bank? My salary has nearly tripled in this 5-year span, so I want to buy a second home as an investment. — Rajiv

Of course you can, provided your income can support the EMIs. Your bank will exclude the total EMI outgo for all these loans, and base your loan eligibility on the remaining amount. Generally, banks fund around 40-50 per cent of your income. The rest is considered as your routine monthly expense. As your salary has tripled, you might just manage to balance all your debts!

However, my suggestion would be to use the extra money you have currently to make some lumpsum prepayments on your home loan, or close out your car loan quickly. This way, you will reduce the loan dues, and also save on your total interest cost! Now that most banks have done away with prepayment charges, this further helps your cause. Doing this alone can increase your loan eligibility further, and help you get a higher loan amount. On another front, having too many loans at any given point in time can be a little risky during emergency situations like difficulties on the job front, recession. So be forewarned and prepared for such unexpected developments, which means you need to have an extra cash reserve for such eventualities, as well!