We Indians are very conservative and have normally been against borrowing until a few decades ago. The earlier generations used to buy or construct their houses after retirement and that too with their retirement funds. However, this perception has changed with increasing urbanisation, easy availability of home loan and increased earnings of family as a unit accompanied with enhanced aspirations. Now, people are generally buying their first house even before getting married with the help of a home loan. It seems that it has become a precondition to own a house of own before getting married.
Home loans are available, generally, for a tenure ranging from five years to 20 years with the tenure going as long as 30 years in some of the cases. While deciding about their home loan tenure, average borrower opts for a shorter tenure of home loan thinking that it will make the house debt free, without realising the implications of opting for shorter tenure of home loan. Looking at the present interest rate regime, I am personally of the opinion that you should opt for longer, available and possible, tenure for home loan to have flexibility. Let us discuss.
Enhancement of home loan amount eligibility
The home loan eligibility is determined on the basis of certain percentage of your disposable monthly income, which can be paid in form of an EMI (equated monthly installments). With all things remaining the same for a shorter tenure home loan, your EMI will be higher and thus you would be eligible for a smaller home loan amount as compared to what is available if you opt for a longer tenure home loan. So with a longer home loan your home loan eligibility also goes up. With the higher home loan eligibility, you can expand your budget for the dream house and can thus afford a better and larger house, with the same income levels.
Flexibility of repayment
In most of the cases the home loan borrowers prepay their home loan before its tenure only a few
borrowers like me let it run through the full tenure. For such earlier part or full prepayment of home loan, the lenders used to charge prepayment penalty of the outstanding home loan. However, the banking regulator RBI and National Housing Bank (NHB), which regulates the housing finance companies, have issued instructions banning them from levying any prepayment penalty which are under floating home loan rates.
At present, almost all the lenders offer their home loans under floating rate regime and only a miniscule lenders offer home loan under fixed rate regime, under which the interest rate remains same for the entire tenure of home loan.
Since there is no prepayment penalty now, you have the flexibility to prepay full or partly pay your home loan, in case you wish to sell the house or just want to make it debt free without having to pay any prepayment penalty. Even in case you have taken home loan under fixed rate from a housing finance company, you can still prepay the home loan without any prepayment penalty in case you are prepaying the existing home loan without borrowing from another institution. Even for home loan under fixed rate, you are still allowed to pay certain percentage of outstanding home loan every year without prepayment penalty.
Maximise your Income tax benefits
Section 24(b) of Income Tax Act allows you tax benefit for interest on home loan. After taking into account tax benefit available, the effective interest rate on home loan is lower than what one can earn on any other alternative investment avenues. So, it is always advisable to avail of this benefit as long as you can. Since there is a restriction of Rs 2 lakhs on claim for interest on home loan for self occupied property and a cap of Rs 2 lakhs for loss, which can be set off against other income under the head income from house property, with shorter home loan tenure part of your interest payment may not get the benefit in case it exceeds the threshold limit.
Moreover, Section 80 C allows you deduction upto Rs 1.50 lakh for principal repayment and with huge amount of home loans required to buy a decent property in case you chose for a shorter home loan duration, a substantial portion of home loan repayment made by you may not be eligible for this benefit due the amount of such prepayment exceeding the limit of Rs 1.50 lakh. In case you opt for a longer tenure, the principal repayment component will be lower and thus enabling you to claim the benefit for longer tenure and maximise your tax benefits.
The writer is a tax and investment expert and can be reached at firstname.lastname@example.org and on his twitter handle @jainbalwant