Home is a lifetime asset which I believe everyone wants to possess as early as possible in their life. After completing the studies, finding a dream job gives wings to fly more. If not backed up with lots of responsibilities, a person always has a dream of owning a house. The saving done in the initial years of their job support you to give the down payment to buy the property but cannot fulfill the required amount. To fill the gap, home loans come into existence and starts shaping your dream into reality. Lots and lots of research and initial checks have to be done before finalizing the Bank/ NBFC to move further with the process. These initial checks and research include checking the right credit score, eligibility for the loan, documentation, interest rate, tenor for the loan, repayment options, prepayment etc and the best part is that Mudra Home does this all for you.
With the change in inflation and reaching to a double digit figure, choosing a right tenor becomes very important as you never know when the interest rates go up. Along with the age, interest rates, loan amount, the tenor is also an important factor which is considered to determine the life of your loan and your monthly EMI.
While calculating the eligibility for borrowing a loan the credit history, monthly income, monthly obligations and the organization with whom you work has a great impact. But Age? Does age influence the loan approval or the loan tenor?
Yes, Age is the foremost factor which is considered for any kind of a loan, especially a Home Loan. Borrowing a home loan in early age helps you to avail a higher tenor for the loan. This means, that if you decide to borrow a home loan in your early 30’s, there is a possibility of getting a highest tenor offered by the Banks/ NBFC’s. The maximum tenor for the loan is 20 years and exceptionally 30 years with few financial institutions. As per the eligibility criteria the retirement age of a salaried individual is 60 years and 65 for self employed. So the loan tenor has to end before the retirement age. Borrowing a loan for a salaried professional in mid 40’s can be much difficult if not impossible. When the loan is sanctioned, the approved amount varies from individual to individual. Similarly it applies for other loans like personal, mortgage, car or a loan against property. For a self employed professional situation of borrowing a loan might not be that difficult. As a business owner, the situation is all different and can easily avail a loan for the next 15- 20 years.
Interest rates: keep your eyes open
Before borrowing a loan, one has to be cautious with the fluctuating interest rates during the loan tenor. One just has to reconsider and understand the fluctuations in the interest rates in past 8-10 years. The fluctuations in the rate of interest, whether fixed or floating, will definitely impact the EMI’s (the sum of money that you pay towards your loan every month) throughout the life of the loan.
I know this is quite easy to say but difficult to do. The reason is the future cannot be predicted and the borrower’s income might not increase as expected in its early 30’s or mid 20’s. Another benefit of early age is to avail increased loan eligibility. While calculating the eligibility Bank/ NBFC consider the present income and the potential increase is also taken as a factor for future. This makes the borrower eligible for top up or a personal loan to take care of the increased EMI’s. The repayment options are also available like step-up repayment facility where the EMI’s grow at a later stage. This is actually correlated with the increase of the salary of the borrower. This option is available for the younger applicants who are professionally doing well.
How does it happen?
Let’s understand the above explanation with an example. Suppose Avika borrows a loan of 50 Lakhs at the rate of 9% p.a. She assumes that the loan tenor will remain the same for the whole loan life. As per her calculation EMI’s for 15 years and for 25 years . Since the amount of repayment in the first case is higher, the principal will be repaid earlier.
In the first year, for a 15 year loan, Rs. 443293 Will be paid towards interest payment and the remaining amount of Rs.165275 will go towards principal repayment.
In the first month, for a 25 year loan, Rs. 447736 Will be paid towards the interest and the remaining amount of Rs. 55784 will go towards principal repayment.
There is no ideal tenor for the home loan. One should go with the best suited EMI which is allowed by your finances and you are comfortable with. One has to be sure that other goals should not suffer due to your home loan and if you find yourself in any doubt it’s better to opt for a longer tenor. This will provide you with the flexibility to prepay your loan using bonuses or any other cash bonanza or jackpot and bring down the loan tenor later. There is no hard and fast rule for the age too but the people in higher age group find it difficult. Age is definitely a significant criterion that helps to decide your Loan Tenor as well as your EMI.
We can observe that the principal is repaid faster in a 15 year loan. The interest paid for 15 year loan is Rs. 41, 28,263 whereas the interest paid for a 25 year loan is Rs. 75, 87,801. Hence, Avika can save a lot on an interest cost if the loan tenor is short. However, it is important to note that 15 year loan is not cheaper than a 25 year loan. The interest cost which you are paying is same at 9% in both cases. It is only that you are paying 9% extra for the extra duration of 10 years in 25 year loan. In short, the longer the tenor, the longer Avika will take to repay the loan and longer she will take to repay, higher the interest she will pay.