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Last Updated: September 30, 2005 12:12 IST
Often, when individuals want to opt for a home loan, they are constrained by the fact that they may not be eligible for the home loan amount they have in mind. This could be because their monthly income does not permit them to opt for such a high amount.
Here, we have evaluated how home loan seekers can enhance their eligibility by selecting a higher tenure.
| Rate of interest (%) | Tenure (Yrs) | EMI per lakh (Rs) |
| 8.00 | 5 | 2,028 |
| 8.00 | 10 | 1,214 |
| 8.00 | 15 | 956 |
| 8.00 | 20 | 837 |
To understand how to increase home loan eligibility by increasing the tenure, we need to first look at the monthly instalments table. As the table above shows, assuming an 8% rate of interest, the individual will have to shell out Rs 2,028 per month per lakh as EMI for a 5-year tenure.
But as the tenure increases, the EMI per month starts falling. As can be seen, for the same amount of Rs 100,000, the EMI per month has fallen to Rs 837 for a 20-year term.
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Let us suppose an individual is earning Rs 25,000 per month and wants to opt for a home loan worth Rs 1,500,000 with a tenure of 10 years.
Based on his monthly income, a certain housing finance company, A Ltd, will compute his loan eligibility based on his net income; say 55% of his take home salary. This works out to Rs 13,750 (i.e. 55% of Rs 25,000).
Based on this figure, A Ltd will then go on to calculate his loan eligibility, which works out to approximately Rs 1,132,000 for a 10-year tenure, assuming an interest rate of 8.00%. But as mentioned earlier, the individual wanted a home loan worth Rs 1,500,000, so Rs 1,132,000 is way below his expectations.
| Tenure (Yrs) | Rate of Interest (%) | EMI/Lakh (Rs) | Loan eligibility (Rs) | Individual's EMI/month (Rs) |
| 10 | 8.00 | 1,214 | 1,132,000 | 13,735 |
| 15 | 8.00 | 956 | 1,438,000 | 13,743 |
| 17 | 8.00 | 899 | 1,529,000 | 12,790 |
Lets see what happens if the individual decides to opt for a higher tenure. If he increases his tenure from 10 years to say, 15 years, his loan eligibility rises to approximately Rs 1,438,000. He will have to increase it by another couple of years, i.e. 17 years, to get the amount of loan that he is looking for. His loan eligibility for a 17-year tenure works out to approximately Rs 1,529,000.
A prime reason why the EMI per lakh falls with a rise in tenure is because the original loan amount (of Rs 100,000) as well as the interest rate remains the same.
What changes is the net interest outgo, which will increase with a higher tenure. Therefore, as the tenure rises, the EMI per lakh falls leading to an increase in the loan eligibility for individuals.
Another advantage that a higher tenure offers to individuals is the choice of prepaying their loan. With increased competition, most HFCs nowadays do not levy charges on home loan borrowers for prepayment.
Individuals therefore, need to bear in mind that if they do their homework right, they stand to benefit from a higher tenure in terms of higher loan eligibility while keeping their EMI the same.
Some figures in the illustrations above have been rounded off for ease of calculations and better understanding for the reader.
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