Since a home loan is a long-term financial commitment, borrowers need to be in a position to afford it. Banks have customised repayment options to address the individual requirements of their customers. A wise planner can make use from the options available in the market.
Step-up repayment
This plan targets early investors, i.e, people who are starting their careers. Under this scheme, banks schedule the equated monthly instalments (EMI) in a proportionate accelerating pattern according to the assumed increase in the customer’s income.
Advantages: A step-up loan not only helps the customer with an affordable equated monthly instalments in his settling years, but also a larger loan amount as compared to normal schemes.
Loans become costly especially in floating rates and if the interest rate is up, as in the initial years more is paid towards interest.
Flexible instalments
This is a customised solution for those who expect a decrease in their income in the later years of the loan tenure, for instance say if any of the applicants retire closer towards the latter half of the tenure.
The repayment schedule is worked out in a way that it is front loaded in the initial years and subsequently decreasing in proportion to the reducing income of the buyer.
Advantages: This option helps youngsters to combine the income of their parents to avail a higher loan. Retiring people are also benefited by an affordable instalment during retirement. This loan is offered only to customers who fall under specific patterns as mentioned. If parents and children apply combined, tax benefits will be less enjoyable for the applicant who is not retired.
Tranch EMI
This option is only for larger loan amounts sanctioned against construction where the loan is disbursed in instalments stretch over a long period. Normally the customer will have to pay a Pre-EMI, (interest for the amount disbursed) till the full loan amount is disbursed. As Pre-EMI payments will never go into the principal, it is not good for customers. So Tranch EMI is introduced by banks, in which, the customer can start paying EMI soon after the first disbursement. EMI can be paid either for the full loan amount or for the disbursed loan amount.
Advantages: This option saves you a considerable sum which is paid as pure interest under Pre-EMI. It also repays the loan faster. Check the amortisation schedule carefully and find how much you save before agreeing. Some banks make this scheme a bit complicated by providing a choice in the instalment amount.
Accelerated repayment
A borrower will have a choice to opt for a higher EMI based on his repayment capacity. For example, a customer’s EMI as per schedule is `10,000 but he can afford to pay Rs 15,000. The normal option left for him is reducing the tenure. As this will affect his tax savings, he can opt for this scheme and rework the existing EMI with an amount ahead of the schedule as per his convenience. Advantages: Loan gets repaid faster resulting in interest savings. Customer can avail maximum tax benefits.
Check if banks levy any charges for choosing this scheme. Also do check the amortisation schedule.
Balloon payment
This option is similar to a step-up loan, but the difference is that more than one-third of the loan amount is paid during the last instalments. A balloon payment is a large, lump sum payment made either at specific intervals, or, more commonly, at the end of a long- term loan. It is an augmentation tool offered by banks to increase the eligibility. A higher loan amount will be sanctioned by combining the maturity amount of some securities such as National Savings Certificate (NSC), LIC policies etc as at the time of sanctioning.
Advantages: The scheme is advantageous only in respect to the higher financial requirement of the customer.
Though appears to be very attractive, it is costly as more interest is payable.
There are several schemes under which a favourable treatment is available but often people miss out on them.A sensible repayment option would lessen your EMI burden and help you repay your loan comfortably.
(The writer is the chief executive officer of bankbazaar.com)