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Payback Time

Author: Sunil Kumar Singh/Tuesday, February 23, 2010/Categories: Loans

Payback Time

Ever wondered if you could decide the Equated Monthly Instalment (EMI) amount you pay to your bank to service your home loan? It is possible! Repaying home loan is a long-term commitment and you have to make your way through the financial ups and downs for many years to pay your lender. This could also mean risking your EMI payment to meet certain exigencies that could knock at the door anytime. 

Your lenders know this, and, that’s why housing finance companies and banks give ample flexibility to home loan borrowers, other than the normal fixed EMI, to tailor their home loan amount and structure their loan repayment schedule as per their convenience and cash-flows.

Let’s see some of the popular repayment options banks are offering to home loan borrowers. But remember that you’ll have to negotiate and convince the bank on whichever mode of repayment you choose. Much also depends on your credit profile and if you’ve a good credit history, you can bargain with the lender for more flexible repayment terms. The bank would also vet your request on parameters such as your income, repayment capacity, bank statement etc to decide whether you’re eligible for normal loan repayment terms or flexible terms. Also, each mode is suited to a particular age-group and financial condition of borrowers. 

Step Up Repayment Facility
Under normal loan repayment terms, your EMI comprising both principal and interest, is pre-determined by the bank (unless of course the interest rate increases). However, under step up repayment, as the name suggests, your EMI remains low in initial years and gradually increases over a certain period. This mode of repaying EMI is suitable for those who’ve just stepped onto the ladder of their career and therefore have enormous prospects for growth in their income going forward. Under such facility, banks structure the EMI proportionate to the estimated increase in the income of the borrower.

“This scheme is helpful for young professionals, where they can get a higher loan amount and pay lesser EMI in the initial period of the loan and increase the repayment as their salary increases,” says Rajiv Raj, Co-Founder & Director, CreditVidya.

Step up repayment facility enables young working professionals borrow higher loan as compared to normal housing loan by assuming a big jump in their income in the future. The borrower pays lower EMIs in initial years and can adjust the loan as per his/her need and also enjoy the same tax benefit even if EMI increases.
For instance, if you have borrowed home loan of Rs 10 lakh for 20 years at interest rate of 10.5% p.a, the EMI you have to shell out comes to around Rs 9,984 per month under normal terms. On the other hand, under step up repayment, the bank gives you flexibility of payment and structures your EMI for first two years to say Rs 5,000; after 4 years about Rs 6,000; after 6 years Rs 7,500 and so on. 

A major downside of step-up facility is that it turns out to be more expensive over the entire tenure of the loan compared to a normal loan repayment. While in a normal EMI, the ratio of interest and principal components is around 80:20, in step up repayment the ratio of interest component surges to 95:5, i.e. your initial instalments have a high share of interest payment.
Accelerated Repayment Facility
This is similar to step-up repayment facility but with a small difference. Under this a borrower has the flexibility to increase the EMI amount if he gets to have a surplus money or when his disposable income rises. The greatest advantage of this facility is that it helps the borrower to repay the loan faster and save on interest outgo. 
As Raj of CreditVidya adds, “Under this scheme the borrower can increase his EMI payment. For example, if his EMI is 20,000 he can start paying 30,000 to repay his loan faster and save interest on loan.”

Balloon Repayment Mode
This is again similar to step up repayment facility, but with a thin difference. Here too the borrower pays a small EMI instalment during initial years, but unlike step-up repayment the EMI outgo inflated excessively after a certain period, akin to a balloon. Hence the name. For instance, if under step-up facility the EMI payment were Rs 10,000 in the first two years, Rs 13,000 in five years and Rs 15,000 in, say, eight years, under balloon repayment plan the EMI could be Rs 5,000 in initial years but could shoot up to Rs 13,000 or 15,000 after a couple of years. 

Step Down Repayment Facility
Contrary to step up repayment, under step down or flip repayment facility, the EMI is higher in initial years but decreases later. While step up repayment is suitable for young executives expecting rise in their income, step down repayment is appropriate for those expecting their income level to fall in coming years. For instance, people who are going to retire in a few years. 
Jitendra Solanki, SEBI Registered Investment Adviser and CFP, JS Financial Advisors, New Delhi, says, “This plan is most suitable for people who borrow loan at higher age i.e. mostly senior citizen or nearing retirement. Since the income capacity alters at later stage, the lower repayment helps in keeping your finances in manageable limits.”

Tranche Repayment Facility
This mode of repayment is suitable for borrowers of an under-construction property. Under this facility, lenders provide facility to borrowers to pay interest as well as the principal right from the beginning, instead of paying pre-EMI. In an under construction property the EMI starts only after loan is fully disbursed and the property is completed. Till final disbursement of the loan, the borrower has to pay interest — called pre EMI interest — on the loan amount drawn by the bank. Pre-EMI is payable every month from the date of each disbursement till the date of commencement of EMI.
However, if you have tranched your repayment, you could save much on your interest cost by circumventing pre-EMI.

“This option is given generally for under-construction project wherein the customer can start their EMI rather than paying only interest in terms of Pre-EMI towards the loan partly disbursed,” adds Raj.
This means if you tranche your repayment, you could choose the instalment amount you want to pay till the time the property is ready for possession. The amount paid above the interest by you goes towards principal repayment. The biggest advantage of this plan is that you can start EMI even when the property is under construction and hence can repay the loan faster. Further, you can save on the interest outgo on the loan too as the principal is repaid faster. 

So before you choose a repayment option, keep in mind that the chosen facility is affordable, it enhances your repayment capacity and gives you tax benefits. 

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