In a first, Bajaj Housing Fin offers extended home loans: Should you opt?

Bajaj Housing Finance has extended the maximum tenor on its home loans to 40 years from 30 years now for salaried applicants. The tenor extension offer is only for new buyers. This comes a few days after the Reserve Bank of India (RBI) kept interest rates steady for the second consecutive time.

Up until now, home loan providers largely provided loans for a maximum tenure of 30 years, while the average loan tenure at the time of agreement is below 20 years.

Bajaj Housing Finance  believes that the tenor extension will allow buyers to be flexible with their repayment at their convenience. 

What's on offer?

With the change in the tenor, Bajaj Housing Finance now offers equated monthly installments (EMI), starting at just Rs 733 per lakh. Its loans start at only 8.50% per annum for salaried individuals and professionals.

Bajaj Housing Finance’s revised tenor capping is subject to the applicant’s age at the time of application. The eligibility criteria 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.

The increase in loan tenor to 40 years brings down the EMI for a borrower. At an 8.5 percent interest rate, the EMI per lakh for a 40-year loan is Rs 733, roughly 5 percent lower than the EMI of Rs 769 per lakh for a 30-year loan.

Different home loan rates from public and private banks as of June 14, 2023

Home loan rates offered by housing finance companies:

 

Is an extension of tenor advisable?

The home loan tenor is the duration or length of time over which a borrower agrees to repay the loan amount to the lender. This includes the payment of principal and interest.

 

.A longer tenor implies lower EMIs but higher interest costs over the life of the loan  because you will be paying interest on the loan for a longer period of time. Shorter tenors result in  higher EMIs but lower overall interest expenses and faster  debt repayment.

"Loan tenure and EMI have an inverse relationship. Thus, opting for a longer tenure would reduce one’s EMI and thereby, increase his EMI affordability. However, this 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 Ratan Chaudhary, Business Head, Home Loans, Paisabazaar.

For example, if one avails a home loan of Rs 30 lakh for 20 years @ 8.60% p.a., his EMI would be about Rs 26,230 and he would incur a total interest cost of about Rs 33 lakh over the loan tenure. If the same borrower opts for a 40 year tenure for the same loan amount, tenure and interest rate, his EMI would decrease to about Rs 22,230 while his interest cost would shoot up to Rs 76.66 lakh, i.e. an increase of about 130%. 

Whare the benefits of a longer tenor?

"Longer tenures for home loan can lower the monthly instalment amount, making it more affordable for borrowers. Lower monthly payments resulting from extended tenures can free up cash flow for borrowers, allowing them to allocate funds for other investments or meet other financial obligations. Extended tenures also help borrowers to qualify for larger loan amounts since the extended term reduces the monthly obligation, thereby improving their loan eligibility," said Adhil Shetty, CEO of BankBazaar.

Disadvantage of a longer tenor?

However, borrowers must know that longer home loan tenures lead to an increase in the overall interest paid over the loan term. Borrowers end up paying more in interest charges, resulting in a higher cost of borrowing. Also, it takes longer to pay off the principal amount, potentially delaying full ownership of the property.

For a Rs 50 lakh loan at 9%, the 20-year interest is Rs 57.96 lakh. But the same loan for 40 years attracts Rs 1.35 crore as interest. If the same loan is paid off in 10 years, the interest is Rs 26 lakh, explains Shetty.

Before you decide to extend your tenor or opt for home loans with a longer tenor, calculate the EMIs for different tenure options and analyse how they fit into your budget. 

A longer tenure is good for the young. A lower EMI gives them leeway with their finances and reduces immediate stress. "The clever thing to do is take a longer tenure and then pay off the loan through systematic pre-payment. This can bring down your interest costs as well. We recommend pre-paying 5% of the loan balance once  a year, which helps pay off the loan a 20-year loan in about 12 years. You could go faster or slower with the prepayments as per your financial situation and objectives," said Shetty.

What are the factors one should consider before deciding on the tenor?

A borrower should consider several factors, such as the current age, post-tax income, and other loan repayment obligations, while deciding the optimal term for a home loan. 

For example, a 25-year-old borrower can opt for a 35 year- long home loan tenure to minimize her EMI outgo, as the salary in the early years of her career is meagre. A longer payment term allows her to explore other investment avenues in the best of her wealth accumulation years. On the other hand, someone in their 40s will have to choose a maximum of 20 years term since the lender institution would want to recover the principal and interest before the borrower retires, explained Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

The most optimal way is to opt for maximum permitted tenure to reduce the EMI obligation and pre-pay the principal over and above EMI in small tranches, depending on the available surplus funds, he added.

Should you opt for long or short tenor loans?

Whenever you opt for a loan scheme, you must thoroughly examine your financial situation, income stability and existing debts. For longer-term loans like home loans, choose a tenure that it aligns with your financial health for hassle-free repayments.

Home loan applicants having lower repayment capacity at present and/or looking for bigger loan amounts can opt for longer tenure, according to Chaudhary. But he cautions that they should also exercise strong financial discipline to ensure prepayments in future for reducing their interest cost. Else, they would end up incurring a much higher interest cost. 

Prospective borrowers should also check whether the lender is charging higher interest rates for offering longer tenure, added Chaudhury.  They should use online home loan EMI calculators to make proper cost-benefit analysis of availing longer tenure, especially if availed at a higher interest rate.

Long Term loan is ideal for individuals seeking extended repayment periods. These loans are commonly used for personal purposes, such as weddings, medical emergencies, and debt consolidation, and for more significant investments like homes or businesses.

How to trim your tenor

Make prepayment a priority. If you receive a joining bonus or Diwali bonus along with your pay cheque, use it to prepay a portion of the loan amount.

Secondly, if possibel increase your EMI till the maximum limit to match the increasei in yout salary in the years to come.