Tenure of the loan is the number of years that the bank offers you to repay the loan. This is a function of your age. For instance, at 25, it is easy to get a 30 year loan, but at 40 years of age, these 30 year loans are tough. Let us look at home loan tenure meaning and the home loan minimum tenure that is ideal.

Long Tenure Loans vs Short Tenure Loans

Quite often, borrowers believe that by getting a longer tenure, they would be able to reduce the EMIs.

This is a two-way street.

While the monthly EMI burden may come down, the amount of interest cost that you pay over a longer period is substantially higher. Check the example below where we have shown 3 home loan tenures, to understand all the different situations better.

The table is quite self-explicit. In the above instance, there is a sharp fall in EMI when you move from a 10 year loan to a 20 year loan, although the total interest paid more than doubles. But then you go from 20 years to 30 years, the interest cost goes up substantially, but the EMI reduction is not large enough. That is where you must avoid very short tenures and very long tenures.

How To Select Your Home Loan Tenure

It is a personalized decision, but here are some basic points to consider when you choose the tenure, assuming that all tenures are available to you.

• First, look at what you can afford. Ideally, your home loan EMI should not exceed 35% of your gross salary. Then decide your EMI accordingly.
• A loan tenure of up to 20 years adds value as it does not substantially increase the total interest paid but surely cuts your EMI substantially.
• Very long-term tenures tend to work against the borrower as the fall in EMI amount does not really justify the higher interest paid out.

Irrespective of the tenure you choose, variable rate home loans can be foreclosed after the cooling period at zero penalty. Hence, if there is a big inflow that you get, use it to defray your home loan (either full or in part) and get closer to your unfettered ownership target.

Tests To Apply When Selecting Home Loan Tenure

Here is a quick list of factors to consider before you finalize your tenure.

• If you are over 45, then longer tenures are not available to you, so that is not even a choice. When you are under 30, choose a tenure of around 20 years, so you can be free of debt by the time you are free. That is a good situation to be in.
• Affordability is a big issue and you can manage the affordability in two ways. You can look at the income levels as a criterion for affordability, or you can also check how much extra you can pay as upfront margin and then decide the tenure of the home loan.
• If you pay lower EMIs, how productively are you going to use the saved funds? That is a very smart question to ask. If you save on EMIs, but splurge the money, then it does not add value. However, if you are opting for a longer tenure and then using the funds to plan for your retirement or your daughter’s education, then it is a sensible decision to go for a longer tenure; and productive too.
• Check how the value of the property moves in the first 5 years and revisit the tenure. If the property has appreciated, then you can afford to wait for a longer tenure. Otherwise, you do run the risk of running into negative equity and the bank demanding more collateral. In that case, shorter tenures make more sense.
• Factor in the worst case scenario. What happens if you lose your job or if your business gets grounded. Then what is the EMI that you can still afford to pay. Use this argument to check how much you can afford to pay as an EMI in a worst case scenario and then decide the tenure accordingly.

To sum up, loan tenure’s meaning is about the time to repay the loan. You can keep a home loan minimum tenure of around 15-20 years, but do not stretch too much on the higher side.