How To Pick The Best Home Loan Repayment Option

It takes great determination to buy a house. To turn their dream of buying a house into reality, most home buyers apply for home loans. Given that the income levels, job security and needs of home loan applicants vary widely, lenders offer different repayment options.

To assess your ability to repay the loan, banks and financial institutions look at many factors – your income, age, job stability and existing loan obligations matter a lot. The loan amount the lender sanctions will bear a strong relationship to your current income. And, you will be expected to pay the equated monthly instalments (EMIs) on time.

MakaanIQ lists the different home loan repayment options available to you. Pick the one that suits you best.

Step-up repayment

If you choose the step-up repayment option, your EMIs will be lower initially. Lenders assume that your future earning potential is high, so you may be able to pay much higher amounts as your income rises. They schedule your EMIs according to your earning potential. This option is for you if you are a young home loan borrower at the beginning of his or her career. The younger you are, the longer will be the home loan tenure that your lender may be willing to offer you. Banks may expect you to pay off much of the debt in the second half of your home loan tenure.

Step-down repayment option

If you expect your income to decline during the latter half of your home loan tenure, the step-down repayment option is for you. This works best for borrowers who are nearing their retirement age. The decline in your EMI will correspond to the decline in your income. Young home loan borrowers might also find this convenient, if they have their parents nearing retirement age as co-applicants. This method is also called FLIP.

Tranche EMI for under-construction properties

When you buy an under-construction apartment, you pay back just the interest component initially. Interest rates are calculated based on the level of construction of the property. For example, your bank may disburse 25 per cent of the loan amount after construction of the first four floors of the property. It might disburse another 25 per cent after another four floors are constructed. Interest rates are calculated according to the amount disbursed, until the property is ready for possession.

Now, how is this option good?

The tranche-EMI facility allows you to fix your EMI until your property is ready to move in. So, unlike in the normal repayment scenario, where you pay just the interest component for the loan amount disbursed, in case of tranche-EMI you pay more than the interest component of the disbursed amount. And, anything above the interest payment goes towards repaying the principal amount. So, this will help you repay your loan quicker.

Accelerated repayment scheme

In this option, you can raise the EMI. So, you are able to repay the home loan before the tenure period you earlier agreed to. You can switch to an accelerated repayment scheme through a formal process after you have started repaying your home loan. Many lenders charge a nominal fee to switch to an accelerated repayment scheme.