Many people tend to borrow loans to buy or construct their homes. The Loan borrowed is later repaid for the same. However, with the increase with urbanization, ease availability of home loans and high earnings of families as a unit has changed. Now many individuals are able to buy or construct their own homes even before marriage. Many borrowers think that if they borrow short tenure on their loans, they will be free from debts quickly which is not the case; one should opt for a home loan with a long tenure.
Higher loan eligibility
An individual higher loan eligibility is determined by the basis of his/her ability to repay their home loans every month, in form of equated monthly installment which is assessed on the basis of one’s disposable income. For the shorter home loan tenure your equated monthly installment will be higher and thus you will be eligible for a smaller home loan amount as compared to those who opt for a longer tenure home loan. For the longer tenure with higher eligibility, one may be able to buy a bigger or better house than who opted for a shorter tenure home loan.
Flexibility of repayments
There are no penalties for repayment of the home loan under a floating rate of interest, you can prepay your entire outstanding or part of the home loan if you want to sell or just be free from any debt. lf you have taken your loan under fixed rate of interest from any housing finance company, you can still prepay your loan without any penalty, as long as you are not borrowing loan from another institution. lf your loan is at a fixed rate of interest, you can still prepay a certain percentage of your home loan outstanding every year, without any prepayment penalty. Though you can become debt free earlier while retaining the flexibility of making payment according to your cash flow.
Income tax benefits
lncome Tax Act provides benefits on interest payment on home loans. The effective home loan rates of interest, after taking into account the tax benefit, is better than what one can earn on any other alternative tax benefits that are as efficient as the home loan interest, it is advisable to avail of this benefit for as long as you can. Section 80C allows for the deduction for repayment of the principal component of the home loan. Nowadays, the quantum of the home loan that is needed to buy a decent property, is fairly large. The principal component, in home loan repayment, will be higher than for the shorter home loan tenure, as compared to a longer-duration home loan. Consequently, a significant home loan repayment will be wasted, as you would not be able to claim the deduction under section 80c beyond the specific limit, in case you opt for a shorter home loan tenure.
Conclusion
In conclusion when one wish to borrow a home loan tenure one should consider on borrowing the longer tenure home loan because the longer tenure home loan has higher eligibility which will enable one to buy a bigger and better house which will improve the property value in future.
