Merits and demerits of 30 year tenure on Home loans In India

Currently most of the banks have risen the home loan tenure up to 30 years owing to the increase in the interest rates from last 18 months depicting an increase of 250 – 300 basis points. This increase have led the borrowers into huge financial trouble in order to match up their EMI’s with their paying capacity. Having a look on this increasing trouble, RBI has given a permission to increase the tenure of home loan up till 30 years. And the result is that the most of the banks have increased the loan repayment tenure by 10 years. For some people it is a matter of an advantage but for some other, it is looking more like a disadvantage. So, let’s find out its merits and demerits. Have a look below:

Merits of 30 year tenure on Home Loans:

Decrease in the EMI’s: As a result of increase in the loan tenure up till 30 years, the loan EMI gets reduced by 16% (as per the research). This is because the interest period gets extended and the amount of interest gets distributed for longer period and hence, the EMI’s gets reduced. This has given a benefit for those whose EMI payment capacity is less and to those who feels little bit overburdened with huge EMI’s.

Affordable housing and a sigh of relief: Many of us dream of our own house but the huge prices and high rate of interests on home loans always discourage us to take a crucial step. But, now with the increase in the loan tenure by 10 years, have actually made the housing affordable with less EMI’s and distributed interest amount. Many of the borrowers gets a sigh of relief owing to the reduction in EMI’s and increase in loan tenure.

Increase in Loan Eligibility in terms of loan amount: As the tenure gets increased, people gets more loan eligibility in terms of loan amount. As there is an increase in tenure, it is assumed to have an increase in income of the borrower in future and thus his/her eligibility in terms of loan amount gets increased.

Increase in Loan Eligibility in terms of age of the borrower: Earlier the borrower gets a home loan up to the period of his retirement or 60 years. But, now with an increase in the loan tenure, the borrower can get a loan for the maximum age of 70 years (maximum in case of repayment of loan).

More beneficial to young people getting less salary: People who are getting less salary and who are young can be benefitted the most with an increase in the loan tenure. As people with less salary can afford the low EMI’s and can opt for longer term as they would be capable enough at that point of time to repay the loan, a 30 year loan tenure for younger people would not be more.

In pre closure cases, this option works out fruitful: In case you want to prepay the loan (in any case after certain period), this option works out fruitful as from your pocket less EMI’s would go, rendering no overburden and a financial crunch to you and your family.

Demerits of 30 year tenure on Home Loans:

High amount of interest: Although you are paying low EMI’s but still the total amount of interest that you are paying over a period of 30 years is very high, which is indigestible once you calculate the amount of total interest.

Burden for 30 years: There would be a huge burden on your shoulders till you prepay the loan amount. For 30 years, carrying a stress of debt can render you certain types of diseases like blood pressure, depression and heart problems.

Not relevant for aged people: If you are an old man nearing an age of 40’s and 50’s, then this option will not work out for you. As 30 years will be very high to determine your stable and regular income.

In case of floating interest rates, there is a huge risk of increasing interest rates: Over a period of 30 years, there is a huge risk of increase in interest rates when you are opting for floating interest rates. Such rise with an inflation can dig your pocket so deep, keeping it all empty.

Therefore, these are the merits and demerits of increase in loan tenure up to 30 years. In nutshell, it is a beneficial option for those whose EMI paying capacity is less and those who are young.

Home Loans: Understanding Your Amortization Schedule

What is an amortization schedule?

A home loan amortization table is the repayment schedule depicting the EMI components of interest and principal and the outstanding balance for every month for the entire home loan period.

How is it calculated?

In order to prepare the amortization schedule you will need to first calculate the EMI on your loan. To do this you will require data on the loan amount or principal, the loan tenor and the interest rate applicable on your loan.

The overall EMI remains constant every month but the way the amount is split between interest and principal payments differs for each month.

At the start of the loan period, a larger part of the amount repaid every month is apportioned towards interest payments. With a progression in tenor, the amount apportioned towards interest reduces and the principal repayments are larger.

This happens because interest is calculated on a monthly reducing balance method. Under this, interest payable is calculated on the balance outstanding at the end of every month. The balance outstanding reduces as more and more of the loan is repaid, thereby reducing interest payable in the subsequent months.

The below illustration details the calculations involved:

Loan Amount	Loan Tenor	Interest Rate
Rs.10,00,000	5 years	10% p.a.

EMI = (P*i)^\ X (1+i)^n

            {(1+i)^n} - 1

where,

P= Principal or Loan Amount

i = interest rate p.m.

n = loan tenor in months

EMI = (10,00,000 * 0.00833) X (1 + 0.00833) ^ 60  =  Rs. 21,247

[(1 + 0.00833) ^ 60] - 1

where,

Principal = Rs.10,00,000

Interest rate p.m. = 10%/12 = 0.00833

Loan tenor (i.e. 5 years) in months = 60 months

Total Amount Payable = EMI * Loan Tenor in months

 = Rs.21,247 * 60

 = Rs. 12,74,820

Total Interest Due = Rs. 12,74,820 - Rs.10,00,000 = Rs.2,74,820

Based on this data, the repayment or amortization schedule is presented as given below:

Month	Opening Balance	Principal Repaid	Interest Paid	Outstanding Balance
1	10,00,000	12,914	8,333	9,87,086
2	9,87,086	13,021	8,226	9,74,065
3	9,74,065	13130	8,117	9,60,935
4	9,60,935	13239	8,008	9,47,696
5	9,47,696	13350	7,897	9,34,346
…..	…..	…..	…..	…..
55	1,23,845	20215	1,032	1,03,630
56	1,03,630	20383	864	83,247
57	83,247	20553	694	62,694
58	62,694	20725	522	41,969
59	41,969	20897	350	21,072
60	21,072	21071	176	0

The figures in the table are arrived at as follows:

First Month:

Interest paid = Principal X Interest rate p.m.

         = Rs.10,00,000 X 0.00833

         = Rs.8,333

Principal repaid = EMI - Interest

              = Rs.21,247 - Rs.8,333

              = Rs.12,914

Balance Outstanding (i.e. Opening Balance 2nd month)

= Principal - EMI

= 10,00,000 - 21,247

= Rs.9,87,086

Second Month:

Interest Paid = Balance Outstanding X Interest rate p.m.

                      = Rs.9,87,086 X 0.00833                                                           

          = Rs.8,226

Principal Repaid = EMI - Interest

                = Rs.21,247 - Rs.8,226

                = Rs.13,021

Balance Outstanding (i.e. Opening Balance 3rd month)

= Opening Balance 2nd month - EMI

= 9,87,08 - 21,247

= Rs.9,74,065

Third Month:

Interest Paid = Balance Outstanding X Interest rate p.m.

                      = 9,87,086 X 0.00833

                      = Rs.8,117

Principal Repaid = EMI - Interest payable

                = Rs.21,247 - Rs.8,117

                = Rs.13,130

Balance Outstanding (i.e. Opening Balance 4th month)

= Opening Balance 3rd month - EMI

= 9,74,065 - 21,247

= Rs.9,60,935

These calculations are repeated for every month of the loan period. In the last month i.e. the 60th month, the last interest payment is made and the entire principal is repaid leaving no balance outstanding.

EMI and Amortization Calculators:

The calculations on your home loan may appear tedious and time-consuming, and they well may be, especially for those who find it difficult to deal with numbers. The process becomes even more time-consuming when trying to make comparisons between lenders or incorporating pre-payments in the schedule. To resolve this issue, online financial tools like EMI calculators and amortization calculators are made available by various online financial services providers. Among the leading sites is that of Bank Bazaar’s, who's online financial tools allow users to not only arrive at required answers but also displays data in a user-friendly format.

Getting Home Loans Online In India

You may be ready to take a loan to fund your dreams for a new home. But the challenge you now face is in getting the loan at the right price, from the right lender with all the right benefits. Given that there are so many lenders out there wooing customers with attractive features on its home loan products it can be quite confusing for a lay person to cover all bases and make the right decision as to which home loan to opt for.

Most people do the age-old exercise of asking friends and family about home loans available in the market and their views or experiences with different lenders, then going down in person to the shortlisted lenders and finding out more about the loans available. They then return home, collate all the required information and documentation and take it back in person to the lender for perusal and review. The applicant then waits to hear whether or not his/her loan has been approved or rejected.

This may be great for the generations of yore who didn’t have the benefit of technology to help get everything done from one place i.e. the comfort of their homes. Lenders have long since embraced technology and established portals through which potential borrowers can browse their loan offerings and the eligibility and documentation requirements. They even go one step further by allowing users of their websites to apply for their loans online, home loans included. All required details for a complete loan application would have to be keyed in by the applicant and the processing begins thereafter. What’s more, applicant’s can subsequently track the status of their loan application through the lender’s website by keying in details from their application.

For e.g. if you were to log into ICICI Bank’s website and navigate to ‘Home Loans’ from under the ‘Products’ tab, you would immediately see an icon that says ‘Apply Online’. By clicking on this icon you are redirected to a page that first determines your eligibility for the home loan by asking you to fill in details relating to the city where your property is, the reason for the loan, the city you currently reside in, your date of birth, and your employment type. You also have the option here of including a co-applicant’s income. You can then get a quote by filling up your name and contact details followed by the loan amount and tenor that you are looking at. Once you decide to apply you can go ahead to the following pages to fill in the loan application.

The process is similar to most lenders and is a very convenient way to apply for a home loan. It saves time and travel and you also get all information regarding the home loan schemes with their details, terms and conditions at one place. It is particularly useful for those who do not have easy physical access to banks/institutions.

While this may be a useful way to apply for a home loan from an individual lender there is still the issue of comparing loan products across different lenders. It can still be confusing and time -consuming for an individual to browse the websites of all lenders in the market and make a comparison based on calculations as to whose offer is the best. There may be lenders you aren’t even aware of much less decide to go to their website.

To overcome this, many financial sites have collated information about lenders and their home loan products into one website. Bank Bazaar is one such company that provides comprehensive information about loan products. By visiting bankbazaar, users can not only get individual lender’s home loan product information but can also easily calculate maturity values, EMIs etc using their online financial tools. They also provide for easy comparison of loans. Users can then apply for loans through this website for the selected lender and obtain great deals that they would not otherwise have got by visiting the bank/financial institution themselves. This is because of Bank Bazaar’s tie-up with various lenders to avail of great rates/benefits to those applying for home loans through its site. Besides the ease of use in applying for your home loan, you can also browse through various user reviews that give you valuable information on their experience with various lenders. Bank Bazaar also has a repository of information on home loans that users can make use of to understand the product and market better.

The ease of applying for home loans online in India will only get more popular as more borrowers begin to trust this mode of dealing with lenders. Besides home loans, various other loans can also be applied for in the above mentioned ways. It would be prudent for all users, though, to do their homework before applying online so as to not sustain a fallout from lack of information or understanding. 

Home Loans: Common Mistakes Borrowers Make

There are some common mistakes borrowers make while opting for a home loan. They are listed below:

Home Before Loan

Home buyers tend to first look for a house or property and then go about trying to get a loan. Ideally, one should consider the loan amount that they will be eligible for then assess their finances accordingly to determine a feasible budget for a new house/property.

Poor Creditworthiness

All leading banks and financial institutions assess the creditworthiness of their customers before approving their loans. Many borrowers are not aware of this and are surprised when they find they have been rejected due to poor credit. An individual can get their credit score/report from providers like CIBIL and check their credit standing. In case of a poor score, the borrower can build their credit rating over a couple years and apply for a loan again at a later date.

Not Negotiating:

Many borrowers take a lender’s loan offer at face value. They do not realise that they can get a better deal by negotiating with the lender on a variety of the terms outlined in the loan offer including interest rates, loan amounts, tenor etc. Those with a good credit-standing can bargain for better rates.

Inadequate Research:

There are number of lenders offering home loan products, each one differing in terms of their offerings to meet the varied funding needs of borrowers. However, a lot of borrowers do not bother to study their options and miss out on good offers. They also do not find out about the lender’s reputation or service.

Incorrect Budgeting:

When home buyers take a home loan, they often only assess their finances to cover for loan repayments and do not factor in other expenses that may arise for which they will need to have savings. For e.g. buying a new car or relocating or education expenses or even medical emergencies. A home loan should be affordable after ascertaining all possible personal financing requirements.

Marketing Gimmicks

Many lenders offer attractive rates as part of their marketing strategy to woo customers. Borrowers fail to study the terms and conditions under such offers and opt for these loans thinking they have got a good deal. They later realise the product doesn’t suit them.

Timing Interest Rates

Trying to time the market for lower interest rates is difficult and many borrowers miss out on a good deal by waiting too long for a more attractive loan.

Home Loan costs:

To most people, loans are looked at in terms of their interest costs but they fail to factor in other charges like processing fees,administration fees etc. which add to the cost of the loan.

Unforeseen circumstances:

Most borrowers do not realise the importance of being able to pay off their home loans, which is a huge debt to satisfy, in the event of untimely circumstances e.g. death. Insuring one’s home loan can help meet repayment commitments in such events.

Inadequate funds:

Obtaining a loan may be possible for a lot of borrowers but they do not account for the fact that lenders do not cover the entire amount due for the property. The down payment is usually borne by the borrower prior to receiving the loan amount and not having adequate funds for this purpose can cause a major glitch in the homeloan process.

Avoiding these common mistakes will ensure a smoother and more satisfactory experience when availing home loans.