Your lender (banks and Non-Banking Financial Companies) considers several factors when you apply for a home loan. These include repayment tenure, income profile, credit score, etc. Repayment tenure plays a significant role in influencing the interest rate. The correlation between home loan interest rates and the repayment tenure you select is inverse. If you choose a long repayment tenure, your lender may give a higher rate of interest, whereas a short tenure may reduce the interest rates.
Understanding the impact of loan repayment tenure on home loan interest rates
Longer tenure: Lenders take on more risk when they offer loans at a longer repayment tenure such as 20 or 40 years. Longer tenures increase the chances of default due to uncertain situations like market conditions, your financial situation, and/ or unexpected events. Lenders adjust their interest rates to compensate for the increased risk. Although longer tenures give the convenience of lower EMI amounts, they lead to higher interest rates on the over loan amount.
Shorter tenure: Shorter repayment tenures of 10 or 15 years are considered less risky. The loan is repaid over a shorter period, reducing the potential impact of economic fluctuations and borrower circumstances. So, lenders often offer lower interest rates for shorter tenures to attract borrowers who can repay their loans quickly. If you choose a shorter tenure, your monthly instalments amounts may increase but you have the benefit of reducing the overall interest.
Market conditions and lender policies: The relationship between loan tenure and interest rate can also be influenced by external factors such as the current market conditions. Economic factors, inflation rates, and Central Bank policies can impact interest rates. Each lending institution may also have its internal policies that determine interest rates based on tenure. So, it is advisable to compare the interest rate offerings before finalising a home loan.
The final decision-making depends on your current financial situation and your prospects. You should assess your financial goals before picking a loan tenure.
Factors influencing interest rates with tenure
- Risk assessment:
Lenders consider the loan tenure when assessing the risk associated with the borrower. Longer tenures carry higher risks for lenders, potentially leading to slightly elevated interest rates. - Market conditions:
Economic factors and market conditions play a significant role in determining interest rates. Lenders may adjust interest rates based on prevailing economic conditions, impacting both fixed and floating rates. - Borrower's creditworthiness:
The creditworthiness of the borrower, as reflected in their credit score and financial history, influences the interest rate offered. While a good credit score can lead to lower rates, the tenure remains a critical factor. - Loan-to-Value ratio:
The Loan-to-Value (LTV) ratio, representing the loan amount relative to the property's value, can affect interest rates. Higher LTV ratios might result in higher interest rates, especially for longer tenures.
