Bajaj Housing Finance has extended the tenure of its home loan products for new borrowers up to a maximum of 40 years. We are not used to seeing home loans of 40-year tenure. Before this, the maximum I had heard was 30 years. So, that’s a sharp jump. I don’t want to go into specifics of home loan products from Bajaj Housing Finance. Loans are a commodity and there is little to differentiate between any two home loan products.
In this post, I want to focus on the loan tenure of 40 years. How does a 40-year affect the loan EMIs, eligibility, and the repayment. Let’s find out.
Higher the Loan Tenure, Lower the EMI
| Loan Amount: Rs 50 lacs, Interest Rate: 9% | ||||||
| Loan Tenure | 10 | 15 | 20 | 25 | 30 | 40 |
| EMI | 63,338 | 50,713 | 44,986 | 41,960 | 40,231 | 38,568 |
| EMI per Rs 1 lac | 1,267 | 1,014 | 900 | 839 | 805 | 771 |
We already know this. Don’t we? This is loan mathematics. Longer tenure means a lower EMI. More affordable. Lesser burden on your pocket, but for a longer term.
Overall, during the loan tenure, your total loan payments will be much higher.
- For the 20-year loan, you pay Rs 44,986 for 20 years. Rs 44,986 X 20 X 12 = Rs 1.07 crores over 20 years
- For the 40-year loan, you pay Rs 38,568 for 40 years. Rs 38,568 X 20 X 12 = Rs 1.85 crores over 40 years.
Note that the difference is only in nominal payments. The cost of the loan remains the same for both the loans.
Higher the Loan Tenure, Greater the Loan Eligibility
| Net monthly income: Rs 50,000, Interest Rate: 9%, FOIR=40%, Max. EMI = Rs 20,000 | ||||||
| 10 | 15 | 20 | 25 | 30 | 40 | |
| Loan Eligibility | 1,578,834 | 1,971,868 | 2,222,899 | 2,383,232 | 2,485,637 | 2,592,818 |
As the EMI goes up, your loan affordability goes. And with a higher loan affordability, loan eligibility goes up.
In the illustration above, I have considered net monthly income of Rs 50,000. Assuming the banks are comfortable with Fixed Income to Obligations ratio (FOIR) of 40%, this means they will be fine until the EMI breaches Rs 50,000 X 40% = Rs 20,000.
For a 20-year loan, the breach happens when the loan amount exceeds Rs 22.22 lacs. For a 40- year loan, the threshold rises to ~26 lacs.
A 40-Year Loan Will Get Repaid at a Slower Pace
| Loan Interest Rate assumed to remain constant at 9% during loan tenure | ||||||
| Tenure | 10 | 15 | 20 | 25 | 30 | 40 |
Percentage Repayment after a certain no. of years | ||||||
| 5 | 39.0% | 19.9% | 11.3% | 6.7% | 4.1% | 1.6% |
| 10 | 100.0% | 51.1% | 29.0% | 17.3% | 10.6% | 4.1% |
| 15 | 100.0% | 56.7% | 33.8% | 20.7% | 8.1% | |
| 20 | 100.0% | 59.6% | 36.5% | 14.3% | ||
| 25 | 100.0% | 61.2% | 23.9% | |||
| 30 | 100.0% | 39.1% | ||||
| 40 | 100.0% | |||||
As you can see, the longer the home loan tenure, slower the pace of loan prepayment. With a 40-year loan, you have just paid 14% of the principal after 20 years of loan EMIs.
Many borrowers are shocked to know that the outstanding principal amount has barely moved even after years of loan repayment. The shock will be even bigger for a 40-year loan. By the way, the banks are not fleecing you. That’s how reducing balance loan EMIs work.
Higher the Loan Tenure, Greater Susceptibility to Interest Rate Movements
| Loan Amount: Rs 50 lacs, Interest Rate: 9% | ||||||
| Loan Tenure | 10 | 15 | 20 | 25 | 30 | 40 |
| EMI | 63,338 | 50,713 | 44,986 | 41,960 | 40,231 | 38,568 |
| EMI per Rs 1 lac | 1,267 | 1,014 | 900 | 839 | 805 | 771 |
| EMI when Interest Rate falls from 9% to 8% | 60,664 | 47,783 | 41,822 | 38,591 | 36,688 | 34,766 |
| % decrease in EMI | 4.2% | 5.8% | 7.0% | 8.0% | 8.8% | 9.9% |
| EMI when Interest Rate rises from 9% to 10% | 66,075 | 53,730 | 48,251 | 45,435 | 43,879 | 42,457 |
| % increase in EMI | 4.3% | 5.9% | 7.3% | 8.3% | 9.1% | 10.1% |
Notice the percentage change in EMIs as the loan tenure goes up.The longer tenure loans are affected more. This helps when the interest rates are falling but can be a huge problem when the interest rates rise. I showed the change for just a 1% hike. Imagine the horror if the rates were to rise sharply in a very short period.
What Should You Do?
40 years is a very long time. That’s longer than more people would be gainfully employed in their whole lives. That’s also the reason why 40-year home loans are not common. As I understand, Bajaj Housing Finance will consider other aspects such as your age and work profile before assigning you the maximum loan tenure. Not everyone would get a loan tenure of 40 years. For you to find out from Bajaj Housing Finance.
There are no right or wrong answers. Nobody wants to take out a home loan for a very long tenure. It is a cash outgo after all. It is the circumstances that force you.
In my opinion, the principal repayment (without any prepayments) for the 40-year is too slow. Hence, this deal will make me a bit edgy. Almost as good as paying house rent. Note that house rent is what you pay to the house owner and the interest is the rent you pay to the bank. However, the good part with home loans is that you can prepay and reduce the tenure of the loan aggressively.
I trust your judgement.