3 reasons to opt for a home loan with a longer tenure

In recent years, home loans have become the first choice of many potential buyers when it comes to raising funds to buy their first home. This is a far cry from the earlier scenario when most buyers preferred to dip into their retirement funds or savings to finance the purchase of their dream home. Not surprisingly it was a process which took a long time or until such time till the buyer had collected sufficient funds to ink the deal.

 However with the arrival of home loans at lower interest rates coupled with the rise in disposable incomes in recent years, this trend has witnessed a sea change. Many Indians are now opting to buy a home at the very beginning of their careers or early post marriage, especially in cases where both partners are gainfully employed.

While this has had a positive impact on the growth of the realty sector, a lot of buyers using the home loan make the mistake of opting for short tenure home loans in their enthusiasm to be debt-free at the earlier.  While this may seem like the obvious choice in the case of people earning very high incomes, it may not be the case with the average employee who should opt for a home loan with a longer tenure of 15-20 years.

Here are three primary reasons why home loans with a longer tenure make more sense, in the long run.

Better Loan Eligibility:
A borrower’s eligibility for a home loan is calculated on the basis of his financial ability to repay the loan monthly in the form of EMIs – which are based on the person’s disposable income. Hence if you opt for a home loan with a shorter tenure, chances are your EMIs will be a lot higher.

Not just that but the loan amount sanctioned could also be a lot lower as opposed to what you could get for a loan with a longer tenure. This could limit your choices in terms of the houses that you could afford. Ergo you will have a lot more and better options to choose from if you opt for a home loan with a longer tenure.
 
Ease of repayment
As per existing rules, there are no penalties on prepayment of home loans with a floating rate of interest. What this means is you have the freedom to prepay the entire loan or part of it, in the event you want to dispose of the property or just enjoy a debt-free life.

Home loans taken a fixed rate of interest can also be prepaid sans any penalty, as long as the funds have not been borrowed from another financial institution. This in turn allows the borrower greater flexibility to repay his debt as per his/her available cash flow.

Tax benefits
As most borrowers are well aware Section 24b of the Income Tax Act, allows for several benefits on the interest component of home loans. Therefore the effective rate of interest, after accounting for the tax benefits is a lot better than the earning potential of any other investment vehicle.

Further the tax benefits available on home loans are more effective in the long term than any other comparable platform and hence it’s advisable to avail of them for as long as possible.

With regard to the principal amount of the home loan, Section 80C of the IT Act allows a deduction of up to INR 1.50 lakhs for repaying the principal component.  With the size of the home loan needed to buy a decent property being quite large these days, the principal repayment component will be higher for a home loan with a shorter tenure, as opposed to one with a longer period of repayment.

This could result in a large portion of the home loan repayment being wasted as the borrower will be unable to claim a deduction under Section 80C beyond the specified limit, in the case of a home loan with a smaller duration.