Home Loans: How to choose the best repayment option

Updated: November 26, 2018 6:52 AM

Analyse your financial needs and adopt the most suitable option

Most lenders have been offering step up EMI option to borrowers wherein home loan EMI repayment is directly linked to expected growth in borrower’s future income.

By Ratan Chaudhary 

Banks and housing finance companies offer a number of customer centric home loan repayment options to suit varying loan repayment requirement of borrowers. However, in order to make the most of the benefits offered by these repayment options, borrowers must carefully analyse their financial needs and opt for the most suitable option.

Step up EMI
Most lenders have been offering step up EMI option to borrowers wherein home loan EMI repayment is directly linked to expected growth in borrower’s future income. This repayment facility involves gradual increase in EMI amount after a few years, which is proportional to the assumed/expected rise in income in near future. Lenders usually structure the loan in such a way that the rate of income growth is assumed at preset rate, for instance at 6-8% p.a., and accordingly the EMI would increase proportionately, in a slab of say, five years for a loan of 15 years.

This type of repayment works well for young borrowers, given that the scope of income growth is higher for them vis-à-vis those in their late 30s or 40s. However, while opting for this EMI facility, remember that loan repayment may become difficult in case the income does not increase as per expectations.

Step down EMIs/Flexible plan
This is just the opposite of the step up EMI facility. Herein, the loan is structured in a way that the EMI amount is higher during the initial years and decreases subsequently in the later years of the loan tenure. Since a higher EMI amount implies higher principal payment, borrowers must try and prepay this loan as soon as they can. However, make sure the prepayment charges, if any, do not defeat the purpose of such prepayment. This repayment option is most suitable for individuals who would be retiring before the loan maturity, implying that their home loan repayment is likely to continue even post retirement.

EMI holiday (moratorium period)
A number of banks and housing finance companies offer moratorium period option to borrowers, usually up to 36 months, during which the borrower is not required to repay any EMI. Even though the borrower does not need to pay any EMI during this period, the loan amount would continue to accrue interest during the moratorium period. The interest charged during during this period gets added to the loan amount and gets adjusted in the form of higher EMIs during the remaining repayment period of loan. Borrowers may have a choice to service the interest amount during the moratorium period, in order to reduce the interest cost of EMIs, which are set to begin upon expiry of this period.

Home loan linked to bank a/c
Some lenders have begun offering home loans that are usually linked to the borrower’s bank account. The interest on the home loan is calculated after deducting monthly average balance in the account from the outstanding principal of the loan. Moreover, borrowers are generally allowed to withdraw or deposit funds from this account, as and when required, thereby ensuring liquidity as well. Depositing a majority of your savings in this linked account would assist in maximising the benefit of this EMI option.

Tranche based EMIs
Usually, on purchase of an under-construction property, borrowers pay pre-EMIs, wherein they are required to service only the interest cost to the extent of disbursed loan amount utilised/availed by them, until the possession of property. But, under the tranche based system, borrowers can begin payment of principal amount immediately along with the interest, implying that their EMIs would be calculated on the cumulative amounts disbursed, inclusive of the principal and not only the interest cost.

-The writer is associate director & head of home loans, Paisabazaar.com

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