Many financial experts in India advise home buyers to apply for a home loan with a longer repayment tenure, citing benefits like lower tax burden, better cash flow, etc. One of the key factors in this decision is the Equated Monthly Installment (EMI), which is the fixed amount you pay each month towards your loan. While in most cases, choosing a shorter repayment duration may not be feasible because of a shortage of funds, if you have the financial capacity to repay the loan within a shorter period, you can choose a shorter duration.
If you are wondering whether choosing a short home loan tenure is a smart move, it has several benefits, like paying off the debt faster and getting complete ownership of the property sooner. This guide discusses the numerous benefits of choosing a shorter home loan tenure and why it is worth saving on interest payments.
With an example and simple mathematical calculations, let us understand how choosing a shorter home loan tenure can help you save a significant amount on the interest paid to the lender.
Let’s say Mr Iqbal Khan, a 29-year-old business owner in Mumbai, avails himself of a home loan of 50 Lakhs from a housing loan lender at an interest rate of 8% per annum. The table below shows the amount he must repay based on his chosen repayment tenure.
| Home Loan Repayment Tenure | Monthly EMI Amount | Total Repayment Amount |
| 5 years | Rs. 1,01,382 | Rs. 60,82,918 |
| 10 years | Rs. 60,664 | Rs. 72,79,656 |
| 15 years | Rs. 47,783 | Rs. 86,00,868 |
| 20 years | Rs. 41,822 | Rs. 1,00,37,280 |
| 30 years | Rs. 36,688 | Rs. 1,32,07,764 |
So, as the table shows, the shorter your tenure, the lower your overall interest payment throughout the loan period, and you can save lakhs of Rupees in the long run.
While you are applying for a home loan and wondering how to choose the correct loan tenure, it is advisable that you use the home loan EMI calculator to your advantage. It is an easy-to-use online tool that lets you compute the exact EMI applicable on your home loan for different repayment tenures.
The tool has a simple interface; nowadays, every lender in India has this tool on their website. To calculate the EMI using the tool, you must enter basic details like the loan amount, i.e., the amount you want to borrow, the home loan interest rate,and the tenure. Once you enter these details and click the ‘calculate EMI’ button, the tool will showcase the results within a few seconds.
So, assess your financial standing and decide the maximum amount you can afford to repay every month on your home loan. Then, choose the loan tenure accordingly. This will help you keep the EMI affordable and save on interest payments.
Tax savings vs savings on the interest payments
Many people believe that choosing a longer repayment tenure is better because it allows them to lower their annual tax liabilities. As per the tax laws, under Section 80C of the Indian Income Tax Act, you can get a tax benefit of Rs. 1.5 Lakh in a fiscal year on the repayment of the principal amount of the home loan. Additionally, you get a tax benefit of Rs. 2 Lakh on the repayment of the interest amount under Section 24 of the IT Act. Thus, the longer the loan tenure, the longer the tax-saving period.
However, you must know that the monthly interest rate of the money you pay as a home loan is much higher than the tax benefits you get. When you choose a housing loan’s maximum tenure of 30 years, you will pay more than Rs. 2 Lakh interest for about 22 years. And for the first 16 years of the loan, you will pay more than Rs. 3 lakhs as interest.
Additionally, you may benefit from the tax savings available under Section 80C of the Indian Income Tax through your investments in different instruments like PPF (Public Provident Fund), life insurance policy, mutual funds, etc. Therefore, you may not be able to get any deduction against the repayment of the home loan principal amount as the overall tax deduction limit under this section is capped at Rs. 1.5 Lakh.
Shorter home loan tenure helps you be more credit ready
Another significant benefit of choosing a shorter house loan tenure is that as soon as you repay the entire amount, you can be eligible to apply for other loans. You cannot know what life throws at you next, and you may require funds for an emergency, like a medical emergency in the family. Being credit-ready gives you the flexibility to get the desired funds without digging into your savings.
Also, when you repay the loan faster, you may have liquid cash at hand, which you can use to invest in different instruments of your choice and focus on other wealth-building goals.
Shorter home loan tenure helps you stay free from encumbrances.
Most people who avail of a home loan to buy their dream home belong to middle-class families and mostly rely on their salary or business income to care for their financial needs. In the event of any unlikely incident like a salary cut, loss in business or unemployment, most people face financial hardships. In the worst-case scenario, the lender may take over the property due to non-payment of the EMIs. A shorter loan tenure can help you avoid such unpleasant situations.
Lastly, the sooner you repay the loan, the sooner you will take full possession of the property you have purchased and become the rightful owner. Once you pay off the loan, ensure you get the NOC (No-objection certificate from the lender) and have no legal obligation to make any more payments to the lender.
Conclusion
Thus, choosing a shorter home loan tenure has several benefits, and it is totally worth it for saving on the interest payments. However, you must know that the EMI will be higher with a shorter loan tenure. So, ensure you have the financial capacity to make higher monthly payments.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
