Is a 40-Year Home Loan Worth It? Pros & Cons Explained

Bajaj Housing Finance offers 40-year home loans

In the home financing space, mortgage loans typically come with a tenure of 20-25 years on average with the best case being 30 years. Now, Bajaj Housing Finance and a few others plan to disrupt the market with a 40-year home loan. For a young professional with a long career ahead, this may sound like a salivating opportunity. After all, the longer the tenure, the lower would be the EMI and hence lower the financial burden on the borrower. However, the argument is not as simple as that. Let us first look at the merits of such a long-tenure loan from the perspective of a borrower and lender.

Table of Contents

1. Bajaj Housing Finance offers 40-year home loans
2. Pros of a 40-Year Home Loan
3. Cons of a 40-Year Home Loan
4. It does look like a win-win situation
5. What are the risks to the lender?
6. Will 40-year loans really help the borrower?

Pros of a 40-Year Home Loan

Lower monthly payments: A 40-year home loan spreads out the repayment over a longer period, which reduces your home loan EMI and makes monthly payments more affordable.

Easier budget management: Using a home loan EMI calculator or 40 year home loan calculator helps you plan your finances with smaller EMIs.

More purchasing power: Lower EMIs mean you might qualify for a higher loan amount, helping you buy a better home.

Flexibility: Longer tenure gives more breathing room during financial crunches without immediate pressure to pay high EMIs.

Access to competitive 40 year home loan interest rates: Some lenders offer attractive rates to encourage longer tenures, which can benefit borrowers.

Cons of a 40-Year Home Loan

Higher overall interest: Though monthly EMIs are lower, the total interest paid over the life of a 40-year home loan is much higher than shorter loans.

Slow equity buildup: Because payments are spread out, it takes longer to build significant home equity.

Potentially higher 40 year home loan interest rates: Some lenders charge higher interest rates for longer tenures, increasing overall cost.

Long-term financial commitment: Committing to 40 years can be risky if your income or financial goals change.

More interest in early years: Early payments mostly cover interest, not principal, which you can estimate using a home loan calculator.

It does look like a win-win situation

On the face of it, the 40-year loan does look like a win-win situation for both the lender and the borrower. The lender is able to prise open a new market since this would bring a lot of young millennials as willing home loan seekers. After all, the EMI offered is around Rs733/lakh, so Rs2 crore home loan will come with a monthly EMI of Rs1.40 lakhs, which sounds like a reasonable bet. For the borrower, the long-term loan gives them a ready home at a very low monthly outflow, something they would be able to afford even at a young age. On the face of it, the product does look like having the potential to benefit both sides of the deal.

What are the risks to the lender?

The biggest risk for the lender would be matching maturities Let us explain this point. If the bank lends a 40-year loan, it must have long-term funding sources to back such assets. Today, in the Indian market it is impossible to get funding for 30-40 years at competitive rates. Even if finance companies are willing to take funding for such maturities, it is unlikely they will get counterparties. 

In the absence of such long-term funding sources, these finance companies would rely on shorter-term loans being rolled over. That can be fraught with risks in a rising interest scenario. Look at what happened to IL&FS. It was successfully funding its long-term assets with short-term liabilities. Everything was fine till rates started going up in 2018 and the money markets became tight. Such credit risk situations can exacerbate quite rapidly as we have seen in the past, so it is best to be wary.

Will 40-year loans really help the borrower?

If you think a long-tenure loan lowers your EMI, think again. A 40-year, Rs1 crore loan at 9.5% interest could cost you nearly Rs4 crore over the tenure—4 times the principal. In contrast, a 15-year loan costs about half that. Plus, a long loan affects your credit rating for years.

So, a very long home loan isn’t advisable due to higher costs and credit impact. Instead, consider structuring with yearly bullet payments to finish faster or plan to prepay early. Long tenures rarely add real value.