Home loan rates are on the rise but so are salary levels. Should you then go for a long-term loan to keep EMIs low or for a short-term one to finish the loan quickly? Let me elaborate.
The steady rise in interest rates has changed a few things in the home financing segment. Not only have monthly EMIs gone up by a few hundred rupees, it has also pushed property buyers to opt for long-term loans. Bankers say that a rise in interest rates coupled with higher property prices makes people go in for home loans with longer tenures. In fact, you would notice that even lenders have stopped making noise about short-term loans which had slipped down to as low as three years.
Home loans till recently were considered a longterm liability and most borrowers kept their tenure at over 10 years. The higher disposable incomes and low interest rates had changed the scene 3-4 years ago. Since income tax deduction was allowed on the interest component of home loan up to Rs 1.5 lakhs, many borrowers reduced their tenures to make good use of the IT benefit. This was particularly true in the case of small loans below Rs 10 lakhs as home loan rates dipped to 7-7.5 percent for five-year loans.
The wheel has come full circle in recent times. Home loan rates have been steadily on the rise in the last 4-6 quarters and have become more expensive. Fresh borrowers are once again back to long-term tenures. Is it good for all?
Loans with long tenures are particularly good for young borrowers as it would reduce their monthly outgo in the early years of their earnings. For instance, an employee in the age group of 25-30, would need more cash than someone in a much older age, as he will need cash for various other expenses like car, marriage or child's education. By keeping the EMI low, he would be ensuring more cash on hand.
Long-term loans are a strict no, if you are in the last decade of your employment. On the other hand, those aged above 50, should ideally look for mediumterm loans so that they don't have high financial commitments from their retirement benefits.
Long tenures are also ideal for businessmen and selfemployed who don't enjoy guaranteed earnings on a monthly basis. Dr B Sanjay, a 44-year-old medical practitioner, has opted for a 15-year home loan for his property though he could easily afford a higher EMI. Instead, Shenoy regularly pays up his excess earnings towards the loan repayment and hopes to repay the entire loan at least 2-3 years in advance.
However, long-term loans too have their share of negatives. Those opting for long tenures should also keep in mind the risks associated with it. For instance, the government currently offers IT benefit on home loans and hence they have become an effective tool for reducing income tax. A borrower may stand to lose the same if the tax benefit is withdrawn on home loans at a later date. For instance, the interest component is much lower in the case of long-term loans compared to short-term loans. When the loan amount is the same, a home loan borrower with a five-year tenure will have a much higher interest component in the initial years as compared to a borrower of 15-year term. This will prove advantageous if the government decides to do away with tax benefit.
Also, borrowers have to keep in mind the interest rate risks.
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