Should you choose Home Loan Tenor of 40 years?

Recently, a home loan lender in India came up with a new offering that allows borrowers to opt for home loan tenor of 40 years!

Yes you read that right. 40 years or 4 long decades. Generally, lenders limit the loan tenor to 30 years maximum. But now, with one lender allowing long 40-year tenor, it is obvious that many others might also start similar offering.

But should you go for it?

Should you opt for such long 40-year Home Loan tenor?

If you understand how loan EMI is calculated (you can freely download and use this Free Excel Home Loan EMI Calculator), you will know that when the loan tenor is increased, it no doubt brings down the loan EMI. But sadly and unsurprisingly, it increases the total interest.

So while lower EMI can be looked at as increasing affordability, we should still not ignore that interest burden increases substantially without the borrower realizing it.

Let me use a simple example comparing the numbers of 30-year loan vs 40-year loan, to help you see it clearly:

Suppose you go for a Rs 50 lakh home loan at 8.5% (which we shall assume remains same for simplicity) for 30 years.

Now your monthly EMI would be Rs 38,446 and total interest costs of Rs 88.4 lakh in case of 30-year loan. But if you took the same loan amount (at same 8.5%) but with a longer 40-year loan tenor, few things will change. First, it will reduce the monthly EMI slightly to Rs 36,655 – a reduction of about 5% or Rs 1,800 per month. Second and more importantly, the interest cost during the tenor increases to Rs 1.26 crore, which is Rs 37-38 lakh or almost 44% more interest burden than you have in a 30-year loan!

And that is the issue with long tenor home loans.

If you compare interest burden for different loan tenors, you will see very clearly that interest increases a lot as your tenor becomes longer.

For a Rs 50 lakh home loan at 8.5%, the EMI and interest costs are as follows for different loan tenors:

For 15-year loan, EMI is Rs 49,237 monthly and the total interest is Rs 38.6 lakh
For 20-year loan, EMI is Rs 43,391 monthly and the total interest is Rs 54.1 lakh
For 25-year loan, EMI is Rs 40,261 monthly and the total interest is Rs 70.8 lakh
For 30-year loan, EMI is Rs 38,446 monthly and the total interest is Rs 88.4 lakh
For 40-year loan, EMI is Rs 36,665 monthly and the total interest is Rs 1.26 Crore

So while whether one goes for 15, 20, 25 year loan will depend on borrower’s income, expenses and EMI affordability, I personally feel that since there is just a Rs 1800 per month difference in EMI of 30 and 40-year loan, it doesn’t make much sense to opt for 40-year loan and pay Rs 37 lakh more in interest burden over the loan tenor. Better to stick with 30-year loan tenor unless you really don’t want to be loan-free early.

If you are financially stable and can afford a slightly higher EMI, it is better to take a home loan with a shorter tenor to save on interest payable.

There is another angle to it.

Taking a 40-year loan means that you may end up repaying your loan well into your retirement. So if you take a loan in your early 20s (assuming you have the income), you may very well be repaying that loan in your 60s as well (when most people retire).

So assuming you don’t prepay, basically you have a home loan hanging for your full working life! You need to think if it is worth it.

Related Reading – What is the best time to Prepay Home loan?

I had been quoted in a MoneyControl article (link) on this topic as well –