Does It Make Sense For Millennials To Apply For A Home Loan In Their 20s

Isn't owning your dream home one of the most cherished dreams we all tend to have as soon as we begin earning? It surely sits on top of our priority list of financial goals, right? But seldom are we able to match our actions with that.

And what excuse do we have? More often than not, we keep on paying the rent and simply just shrug it off by saying it's too ¡®early¡¯ to take a home loan while we're in our 20s. Despite home loans being available as a gateway to own your home, it's surprising that a dream that we hold so close to our hearts is often delayed to later years of work-life instead of being at the forefront.

Curious to know why availing a home loan to own your dream home in your 20s can turn out to be a wise move? Read on as we dig deeper into this thought and put forth multiple reasons to say yes to taking this big financial step in your 20s itself.

1. Extract the benefits of step-up home loan facility

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In their bid to continuously grab new borrowers towards taking the giant leap of availing a home loan, lenders keep on improving consumer experience through strategies like product innovation and loan offers like concessional interest rates, processing fees waiver etc. One such product specifically devised to attract the millennials towards home loans is ¡®step up EMIs.¡®

In this facility, the home loan EMI¡¯s repayment is linked to the assumed expected growth in the millennial borrower¡¯s future income. In accordance with the rise in income, a gradual increase in the EMI amount after the initial few years gets kick-started, which is proportional to the assumed/expected rise in borrower¡¯s income in near future years during the tenure of home loan. Lenders tend to generally structure this facility of home loan in such a way that the rate of income growth is assumed at a preset rate, for instance at 5%-8% p.a, and thus, accordingly, the EMI increases proportionately at preset intervals every 3 years or 5 years.

Given that the scope of income growth is deemed to be generally brighter for millennials in their 20s vis-a-vis those in their late 30s or 40s, this home loan repayment facility works well for this target group of such young borrowers. Through this facility, they can grab hold of the twin benefits in the form of owning a house at a young age coupled with payment of lower EMIs in the initial years of the loan repayment tenure. However, while choosing for this EMI facility, always remember that in case the income doesn't increase as per expectations, the repayment may become difficult with the increase in EMI amount at gradual intervals.

2. Longer period of time for property¡¯s value appreciation

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Another crucial benefit of being a young home loan borrower is that the earlier one buys a home, the longer time your house has to witness an appreciation in its value over the years. Although the expected appreciation in value would depend on multiple factors like inflation, geographical location, market¡¯s demand and supply, infrastructure, etc, availability of a relatively elongated period of time tends to boost the chances of witnessing value appreciation of property.

Also Read: Does It Make Sense To Look At Real Estate As A Part Of Your Portfolio?

3. Higher home loan eligibility

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Millennials in their 20s generally tend to have relatively lesser financial obligations vis-a-vis those in their 30s or 40s, which works in their favour when applying for a home loan in their 20s.

Since lenders consider a borrower's EMI to income ratio as one of the most crucial parameters while assessing their repayment capacity, a lower EMI to income ratio automatically boosts one¡¯s home loan eligibility and approval chances. Simply put, your EMI to income ratio is the proportion of your monthly income already being utilized to repay loan EMIs. Having a higher ratio depicts an imbalance between your monthly income and EMI repayments, which indicates higher chances of defaulting in future whenever an adverse life event, financial exigency or additional expense arises unannounced in your financial life. Whereas on the other hand, relatively lower financial responsibilities and commitments in the initial work life years enables them to have a lower or nil EMI to income ratio, which often turns out to be beneficial for millennials in their 20s.

Another reason for higher loan eligibility for millennials in their 20s is that the farther you are from your retirement years, the higher number of active work life years you possess to conveniently repay the home loan with existing income. That's why lenders are generally hesitant towards lending a home loan to those in their late 40s or 50s since they have a lower number of working years left and chances of life¡¯s uncertainties tend to become higher in that age bracket.

4. More breathing space in near-retirement years

As home loan tenures stretch upto 20 to 30 years to spread the burden of EMIs amongst a long tenure, taking a home loan in your 30s or 40s increases the likelihood of having to repay the home loan EMIs till the very end of your work life years, i.e. till your retire around the age of 60.

What this does is, it deprives your finances of the much needed breathing space in your later years of worklife. Whereas in case you instead opt for a home loan in your 20s itself, you stand a higher chance of comfortably completing the repayment before your retirement years start approaching, i.e your 50s.

Moreover, as your income in your 30s and 40s is likely to be higher than that in your 20s, you also stand a higher chance of prepaying the home loan with your surplus funds, before the tenure maturity, thus allowing even more breathing space when it comes to the later years of worklife.

Also Read: From Real Estate To PPF: Top Investment Options To Help Millennials Retire Early

5. Availability of longer tenures to shorten EMIs

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Earning millennials in their 20s tend to stand a brighter chance of getting a longer repayment tenure for their home loan, going as high as 30 years for most lenders. This is because millennials in their 20s have more number of active worklife years ahead, which gives them a long period of time to sufficiently repay the home loan EMI obligations.

Now, what does this availability of longer tenure imply for a millennial borrower? Having a longer repayment tenure ensures that your loan obligation in the form of EMIs, gets distributed over a longer period of time, implying lower monthly EMI outgo.

For example, suppose you aim to take a Rs 50-lakh home loan being offered at an interest rate of say, 7% p.a. Now, your EMI on opting for a 15-year tenure would come out to be close to Rs 44,941, Rs 38,765 for a 20-year tenure, Rs 35,559 for a 25-year tenure, and Rs 33,265 for a 30-year tenure. Hence, the longer your tenure, the smaller your EMI amount. But the only caveat of opting for a longer repayment tenure is a higher overall interest cost of the home loan, which in these different tenures, comes out to be Rs 30.89 lakh, Rs 43.03 lakh, Rs 56.01 lakh and Rs 69.75 lakh, respectively, for 15,20,25 and 30 years tenure.

But still, it's better to opt for a longer tenure. Here's why. Having a lower EMI burden every month through longer tenure, which in itself allows more room for contributing towards other financial goals, also enables you to save for the home loan¡¯s prepayment, which further assists in reducing the overall interest payout. Even if you couldn't separately accumulate a corpus for prepayment or foreclosure, you can keep making partial prepayments as and when you have surplus funds during the tenure. This way, you get to avail the benefit of smaller EMIs and also keep the interest costs down by making prepayment whenever possible. Also, if you instead opt for an aggressive repayment schedule through shorter tenure and hence bigger EMIs, you stand at the risk of cramping your finances and getting pushed towards redeeming investments or taking more loans whenever financial exigencies or any adverse life event comes up, which results in a financial shortfall. So, the key lies in going for longer repayment tenures and then making prepayments as and when possible.

Now that you are aware of the numerous benefits of taking a home loan in your 20s, the first step towards realizing this dream is to accumulate the down payment money, right? Click here to know more about it.

What to keep in mind before submitting a home loan application?

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It's a no-brainer that taking a home loan is a big step and probably the biggest financial commitment in our life. Even the existing all-time low interest rates on home loans are enticing enough to make us think of taking the leap of faith towards a home loan, right? But remember, home loan EMIs tend to take a big chunk of our monthly budget. And the huge cost attached to owning a property, coupled with the total interest cost of home loans, makes it important to make sure you are financially ready to take up this responsibility.

Besides planning out the accumulation of down payment corpus, other key steps that comprise of a solid financial plan, include building and maintaining a good credit score, checking your EMI affordability on online EMI calculator tools, including the expected EMI amount into your emergency fund and comparing as many lenders as possible before zeroing in on any.

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