Home Loan Tenure: Should You Go Short-Term or Long-Term?

Posted On August 14, 2024

So, you’ve just sealed the deal on your dream home, and now the real question is: How long do you want to be paying those monthly payments?

Are you looking to dash to the finish line with a short-term loan, or are you more of a long-distance runner, taking it easy with a long-term option?

It’s not just about the numbers, it’s about what fits your lifestyle and future goals. So, stay with us as we dig into this decision and determine which route can get you to the finish line with the least hassle.

Breaking Down Home Loan Tenure

The Home Loan Tenure is the duration you commit to repaying your home loan. It can vary from a short-term of a few years to a long-term, extending up to 30 years.

The tenure directly influences the monthly EMI (Equated Monthly Installment) and the total interest amount paid over the loan’s lifespan.

Choosing a short-term loan means higher EMIs but lower total interest paid, while a long-term loan results in lower EMIs but a higher overall interest payment.

Short-Term Home Loans

Short-term home loans, usually lasting 5 to 10 years, are ideal for individuals aiming for quicker debt repayment or those with a robust income to support larger EMIs.

Benefits of Short-Term Home Loans:

• Lower Total Interest Paid: Short-term home loans lead to significantly lower interest payments due to the shorter loan duration, saving your money in the long run.
• Swift Debt Clearance: Opting for a short-term loan allows you to become debt-free sooner, providing financial freedom and enabling you to focus on other investments or savings.
• Better Interest Rates: Short-term loans often come with lower interest rates, reducing the overall loan cost and making them a more cost-effective borrowing option.
• Faster Equity Building: Higher EMIs in short-term loans lead to quicker repayment of the principal amount, accelerating the buildup of equity in your home, which can be advantageous for the future – like selling or refinancing the property.

Drawbacks of Short-Term Loans

• High Monthly Payments: Short-term loans come with the downside of higher EMIs, which can strain your finances, particularly if your income is limited or if you have other financial obligations.
• Financial Constraints: The elevated EMIs may lead to a tighter budget, reducing your disposable income and potentially impacting your capacity to save, invest, or indulge in leisure activities.
• Stringent Eligibility Criteria: Lenders often impose stricter eligibility requirements for short-term loans due to the increased EMI burden. This may necessitate a higher credit score or a more substantial income to qualify.

Long-Term Home Loans

If you opt for a long-term home loan, you can expect a repayment period typically spanning 20 to 30 years.

This option may be best for individuals seeking lower monthly payments, even though it may entail paying more in interest over an extended period.

Benefits of Long-Term Home Loans

• Reduced Monthly Financial Burden: By spreading the repayment over a longer period, you can enjoy the benefit of lower EMIs, which eases your monthly financial commitments and helps in better budget management.
• Improved Loan Eligibility: Long-term home loans with lower EMIs may offer more relaxed eligibility criteria, potentially enabling borrowers with moderate income or lower credit scores to qualify for the loan more easily.
• Enhanced Financial Flexibility: Lower monthly payments from long-term loans provide you with greater financial flexibility, allowing you to allocate funds towards other financial goals such as retirement savings, other investments, and day-to-day expenses with reduced strain.
• Extended Tax Benefits: The extended repayment tenure allows for a longer duration of tax benefits on the interest paid, as per Section 24(b) of the Income Tax Act, aiding in maximizing tax advantages over time.

Drawbacks of Long-Term Loans

• Increased Total Interest Payment: Long-term loans often lead to a higher total interest payment due to the extended repayment period, even if the interest rate remains the same as that of a short-term loan.
• Slower Equity Accumulation: Lower EMIs contribute to a slower repayment of the principal amount, resulting in a slower buildup of equity in your home. This can pose a challenge if you intend to sell or refinance your property in the future.
• Prolonged Debt Commitment: Opting for a long-term loan extends your period of indebtedness, which may introduce prolonged financial stress and impact your ability to make other significant financial decisions in the future.
• Exposure to Interest Rate Fluctuations: Long-term loans with floating interest rates expose you to the risk of unexpected increases in EMIs due to interest rate fluctuations over time, potentially impacting your financial planning.

Factors to Consider When Choosing Between Short-Term and Long-Term Home Loans:

• Income Stability: Assess the stability of your current and future income. If you anticipate a consistent income rise, you may consider a short-term loan.
  
  However, if your income is uncertain, opting for a long-term loan with lower EMIs may provide greater financial security.
  
• Financial Objectives: Evaluate your long-term financial objectives. If your goal is to become debt-free swiftly or to invest in other areas, a short-term loan may be more suitable.
  
  Conversely, if you prioritize financial flexibility with lower monthly payments, a long-term loan could be the preferred option.
  
• Interest Rate Environment: Analyse the current and projected interest rate environment. If rates are currently low and expected to increase, opting for a long-term loan could prove advantageous.
  
  Conversely, in an environment with high current rates expected to decline, a short-term loan or a loan with a shorter fixed-rate period may be more favourable.
  
• Loan Amount: Consider the impact of the loan amount. Larger loan amounts may be more manageable with a long-term tenure, while smaller loans can be repaid at a faster pace with a short-term tenure.
  
• Tax Implications: Assess the tax benefits associated with loan interest payments. Extending the loan tenure may, in some cases, maximize tax benefits over an extended period.
  
• Risk Preference: Evaluate your comfort level with risk. If you are amenable to higher EMIs and the associated risk, a short-term loan may align with your preferences.
  
  Conversely, if stability and predictability are your priorities, a long-term loan may be the more secure choice.
  

When choosing between short-term and long-term home loans, consider your financial situation, goals, and risk tolerance.

A short-term loan is ideal for paying less in interest and clearing debt quickly, while a long-term loan offers lower EMIs and greater financial flexibility. Evaluate your income, future financial plans, and the current interest rate environment before deciding.

Consulting with a financial advisor can provide personalized insights. Remember, the right home loan tenure aligns with your financial goals and provides peace of mind.

Save Max Real Estate Brokerage has partnered with leading banks including SBI, HDFC, Bajaj Finserv, and ICICI to offer seamless home loan solutions. Contact us today and let our dedicated team connect you with these partners, ensuring you receive the best possible solutions lower interest rates.