Home loans can sometimes be a shock to those applying for them for the first time. The prospects of high interest rates on a non-liquid asset as well as, not being able to pay multiple outstanding bills etc. can lay a lot of financial pressure on an individual. A lot of these unwanted conflicts can be avoided if one knows a few things prior to applying for a home loan.
Factors that affect your decision to choose between Short-Term or Long-Term home loans:
- Income: The tenure of your loan is an important factor that also dictates the amount of interest that you end up paying. If you have a good income, opting for a short-term loan would definitely make sense as you would pay higher EMIs but will end up paying lesser overall interest as compared to long-term home loans
- Age: Your age has a significant effect on your ability to repay your home loan. E.g. if you are 25 to 30 years old, you can opt for long term loans as banks will provide you with loans up till your retirement age. However, it is advisable that you go in for a short-term loan in case you are opting for one say at the age of 40 / 45 as
- Rate of Interest: Be it a short-term or a long-term loan, a critical factor in making a choice is the type of interest that you have availed on your loan. Is it fixed or floating? A floating interest rate fluctuates basis the market conditions whereas the other remains fixed for the entire duration of the loan tenure.
Other important points that you can also consider when deciding between Short-Term Vs. Long-Terms loans:
Slow reduction of outstanding at the initial stage
The interest component is quite high during the first few years, no matter how much the EMI amount of the home loan taken. Usually during the initial years, a smaller portion of the EMI goes towards paying the principal amount. Pre-payment can be the way to go during this period as its timing is based on this calculation and it is best to pay through pre-payment during the first few years.
Insistence of banks on changing tenure of loan than the EMI
Banks are more inclined to compensate on the home loan repayment period rather than altering the EMI amount even though it is generally thought that when the RBI slashes the interest rates, it will reduce the EMI amount. To save themselves from the inconvenience of altering the EMI amount, these lenders ration the tenure by modifying the ECS order. The borrower is benefited if the interest amount falls and simultaneously the tenure is reduced.
Reset clause that comes with the fixed interest rate
In case of home loans, even fixed interest rates are prone to reset clauses which call for revision when the interest rates shoot up. This varies from bank to bank as they get assurance of a steady streaming of cash even if there is a rise in the cost of funds – but this happens only as a last resort type of measure as fixed rates rarely change.
The above are a few points that will help you make an informed decision, however, it is advisable that you conduct your own research in order to avail a loan that best suits your needs.