Want a longer home loan tenure of 40 years for lower EMIs? Be ready to pay 133% higher interest

Bajaj Housing Finance has recently extended the maximum tenure on its home loans to 40 years from 30 years for salaried borrowers, who are new home buyers. Up until now, barring some exceptions, home loan providers typically offer loans for a maximum tenure of 30 years. Longer tenure helps you bring down the EMI amount. After a steep rise in interest rates, isn’t a 40-year home loan with lower EMI an attractive deal, considering you have 10 more years to repay the loan? Probably not. Let us understand why.

40-year home loan: What it offers

For a 40-year home loan, the housing finance company now offers equated monthly installments (EMIs), starting at Rs 733 per lakh. Home loans at Bajaj Housing Finance start at an interest rate of 8.5 per cent per annum for salaried individuals and professionals. The housing finance provider has revised the tenure capping subject to the borrower’s age at the time of the home loan application, it mentioned in a press release. The eligibility criterion for age with Bajaj Housing Finance is 23 to 75 years, with 75 years as the upper limit for age at the time of loan maturity. This means that only those people who are in the age bracket of 23 years to 35 years will be able to get a full 40-year loan tenure. For a 45-year-old person, the maximum tenure will remain 30 years.

40-year home loan: How it will impact home loan borrowers
“A higher tenure means borrowers can borrow a larger loan amount as their monthly outflow in the form of EMIs is smaller,” said Adhil Shetty, Chief Executive Officer (CEO), BankBazaar.com. For instance, at an interest rate of 8.5 per cent, the EMI per lakh for a 40-year home loan will be almost 5 per cent lower than the EMI per lakh for a 30-year loan.

Longer home loan tenure: A heavy cost to pay
Undoubtedly, an extended home loan tenure reduces the monthly loan EMI burden. However, it comes at the cost of high-interest outflow, which increases the overall cost of the loan significantly. Let us understand this with an example.

Source: Paisabazaar and ET Wealth Online

Suppose you want to take a home loan of Rs 50 lakh at an interest rate of 8.6 per cent for 20 years. Your monthly EMI will be Rs 43,708 and the total interest outgo for the entire period will be Rs 54.89 lakh. Now, if you extend your home loan tenure to 30 years, your monthly EMI will come down to Rs 38,801. However, your overall interest outflow will jump to Rs 89.68 lakh. Now if you opt for a home loan tenure of 40 years, your monthly EMI will decrease significantly to Rs 37,036. Your total interest for the entire home loan tenure will, however, surge to Rs 1.27 crore.

The interest outflow for a 40-year home loan is 42.5 per cent more than the interest outflow for a 30-year loan. It will be 1.33 times higher when compared to the interest outflow for a 20-year home loan.

The EMIs and loan tenures have an inverse relationship. “If a borrower opts for a longer loan tenure, it would reduce his EMI and thereby, increase his EMI affordability. This increases the chances of loan approval for the borrower as well as his chances of availing bigger loan amounts. However, longer loan tenure would also lead to higher interest costs for the borrower. Moreover, the quantum of EMI reduction is not proportionate to the increased interest cost incurred for availing longer tenure,” said Naveen Kukreja, Co-Founder & CEO, of Paisabazaar.

Moreover, a longer tenure means that borrowers may end up repaying their loans well into their retirement years. “For instance, if you take a loan in your late 20s or early 30s, which data shows is the typical age when people invest in their own home, you may very well be repaying that loan in your 70s. This can be risky as your retirement fund would have to support your living expenses as well as your home loan EMI for over a decade after you retire,” said Shetty.

40-year home loan tenure: Who should opt for it, who shouldn’t
Those prospective home loan borrowers who are looking for a bigger home loan amount and have lower repayment capacity at present, can go for longer home loan tenures, explained Kukreja. But this would be ideal only when they have some capacity to absorb further interest rise and EMI hike and expect income to rise in coming years and to continue during retirement years.

“Those who choose the maximum tenure to keep the EMIs low should prepay the principal over and above EMI in small tranches, depending on the available surplus funds. As the principal amount decreases, the interest obligation reduces faster,” said Ajinkya Kulkarni, Co-founder, Wint Wealth. Else, they will end up incurring much higher interest costs for their home loan.

“Whether one goes for a 15, 20, 25-year loan will depend on borrower’s income, expenses, and EMI affordability. Since there is just a Rs 1,765 per month difference in EMI of a 30-year and 40-year loan, it does not make much sense to opt for a 40-year loan and pay Rs 38 lakh more in interest burden over the loan tenure. Better to stick with 30-year loan tenure,” said Dev Ashish, a SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor.

“If you are financially stable and can afford a slightly higher EMI, it is better to take a home loan with a shorter tenor to save on interest payable,” Ashish said.

However, say your spouse is on sabbatical and is expected to join the work again soon, then this long-tenure loan will work in your favor to help you afford a bigger house.

“To decide the correct tenure for a home loan, a borrower should consider the current age, post-tax income, and other loan repayment obligations etc. For example, a 25-year-old may earn comparatively less in the early years of her career. So, a 35-year-long home loan helps to minimise the EMI burden. However, someone in their 40s can only take 20-year-long repayment terms since the lender wants to recover the principal and interest before retirement,” said Kulkarni.

Home loan borrowers must compare rates and total cost before taking a loan
“Home loan applicants should use online home loan EMI calculators to undertake a proper cost-benefit analysis of availing longer tenures, especially if availed at higher interest rates. They should compare the EMIs, and total interest cost incurred for various loan tenures before choosing their optimum tenure,” Kukreja explained. He mentioned that borrowers should also check whether the lender is charging higher interest rates instead of offering longer tenures.