5 Home Loan EMI options to choose from
Home loan lenders have been offering a number of customer centric repayment options, tailor made to suit varying loan repayment requirements of different borrowers. However, to make the most of the benefits offered by these repayment options, borrowers need to carefully analyze their financial needs, and accordingly opt for the most suitable option. Let us explain some of these EMI options to assist you in taking the right decision:
Step up EMIs
Most lenders have been offering the facility of step up EMIs, wherein the home loan EMI’s repayment is directly linked to the expected growth in borrower’s future income. This repayment facility involves a gradual increase in the EMI amount after initial few years, which is proportional to the assumed/expected rise in borrower’s income in near future. Lenders usually structure the loan in such a way that the rate of income growth is assumed at a preset rate, for instance at 6-8% p.a, and accordingly the EMI would increase proportionately, in a slab of say, 5 years for a loan of 15 years.
This type of repayment works well for young borrowers, since the scope of income growth is brighter for them, as compared to those in their late 30s or 40s. Such borrowers can own a house at a young age and pay lower EMIs in the initial years of the loan. However, while opting for this EMI facility,one must remember that in case the income doesn’t increase as per expectations, the repayment may become difficult with the increase in EMI amount.
Step down EMIs/Flexible loan installment plan (FLIP)
Another common repayment option offered by some home loan lenders is step down EMIs/FLIP option. 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, I.e. to save on the overall interest payout.
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. This is because,post retirement, the borrower’s income and repayment capacity is most likely to reduce in the later stages of loan and therefore step down EMIs would assist in lowering the EMI repayment burden post retirement.
EMI holiday (moratorium period)
A number of home loan lenders offer this EMI repayment option of providing a moratorium period usually up to 36 months, during which the borrower is not required to repay any EMI. The EMI repayment begins at a later date, unlike otherwise wherein it begins in the month immediately succeeding the disbursal month. However, even though the borrower doesn’t need to pay any EMI during this period, the loan amount would still continue to accrue interest in this period as well. The interest charged during moratorium 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 this interest amount during this period, in order to reduce the interest cost of EMIs, which are set to begin upon expiry of this period.
Home Loan linked with bank account
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 the 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 maximizing the benefit of this EMI option.
Tranche based EMIs
Another EMI repayment option provided by few lenders is the tranche based EMI system. Usually, on purchase of an under construction property,borrowers pay the pre-EMIs, wherein they are required to service only the interest cost to the extent of disbursed loan amount utilized/availed by him/her, until the possession of property.
But, under the tranche based system ,borrowers can begin payment of principal amount as well, 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.
Here, the borrowers must remember that the principal repaid during this pre-construction period isn’t eligible to be claimed as tax deduction. However, post receiving possession, the interest component (for self occupied property) of both pre and post construction period can be claimed as tax deduction, but the total claim cannot exceed Rs.2 lakh in a particular financial year.
This Article was Originally Published in The Financial Express