Repayment Options for a Home Loan

October 18, 2021

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The amount borrowed for a Home Loan is generally on the higher side, as compared to any other type of loan. Still, owning a house is a dream for many, which is why Home Loans own considerable popularity in the debt market. Today, there is no dearth of Home Loan providers. The lenders often entice customers with their attractive interest rates and exclusive Home Loan offers. While availing a Home Loan is no longer a difficult task, repayment of such a huge amount could sometimes become a burden. Therefore, it is important to explore all the best possible repayment options while applying for a Home Loan.

EMI Holiday/ EMI Moratorium

Some Home Loan providers offer an EMI holiday at the start of your Home Loan repayment. This EMI holiday is nothing but a delay in the deduction of EMIs from your bank account by a few months after the disbursal of the Home Loan. This 3-EMI process allows a borrower to start the repayment procedure after 3 months of availing the Home Loan. An EMI holiday offers considerable relief, as the borrower has to clear expenses related to registration fees as well as stamp duty on the new home, during the initial stages of application. This delay in EMI payment offers relief to the borrower to get his/her finances in order, and plan the repayments of future EMIs in a more efficient way.

Step-Up Repayment Option

A Step-Up Repayment option involves an eventual increase in the EMI amount, as the loan tenure progresses. This means that during the initial years of repaying your Home Loan, you will have to pay less EMIs, and the amount will increase as the loan tenure progresses. The Step-Up Repayment option is suitable for borrowers who have recently started their career. This is because during the start of their career, they might not have enough funds to pay huge EMIs. However, as their career progresses and their financial prospects start to improve, they are in a better position to manage an increase in their EMIs.

Step-Down Repayment Option

A Step-Down Repayment is the opposite of a Step-Up Repayment option. Here, the borrower sees an eventual decrease in the EMI amount, as the loan tenure progresses. This means that during the initial years of repayment of your Home Loan, you will have to pay a higher EMI, and the amount will eventually decrease as the loan tenure progresses. The Step-Down Loan Repayment option is suitable for borrowers who are nearing their retirement. It would be easy to pay the high EMIs with a steady source of monthly income. The eventual decrease in the EMI amount, considerably reduces the financial burden as retirement approaches.

Lump-Sum Repayment

A Lump-sum Repayment is an ideal option when the borrower wants to repay the entire loan amount immediately, even before the end of the loan tenure. In case of a Home Loan on under-construction projects, the total loan amount is not disbursed all at once, but is granted in instalments instead, as the home construction work progresses. In this case, the borrower is only required to pay interest on the loan amount drawn till the final instalment has been disbursed. It is only after the disbursal of the final instalment, that the EMIs are payable by the borrower. However, if the borrower wishes to repay the principal amount immediately, he/she can choose to start paying the EMIs on the disbursed cumulative amount. The lump-sum payment amount would be first adjusted for the interest, while the balance amount will go into the principal repayment.

Balloon Repayment Option

The Balloon Repayment option is similar to the Lump-Sum Repayment option. However, in this case, the borrower makes a large payment (around one-third of the loan amount) as the last instalment. A Balloon Loan is ideally taken for a shorter term, where the final balloon payments tend to be almost twice the size of the initial instalments. In this loan the repayment option, a small portion of the Home Loan’s principal balance, gets amortised, over time.

Refinancing

Refinancing of a Home Loan involves repaying the outstanding balance of the existing Home Loan by availing a new loan. This new loan generally comes with lesser interest rates and better repayment options, so that the borrower’s repayment capacity is not hampered. Refinancing your existing Home Loan with a new loan, which offers affordable interest rates, may help lower your EMIs. Also, a borrower can negotiate a shorter tenure on the new loan for refinancing. Transferring your Home Loan balance to a new provider may also help boost your credit score.

Prepayment

In case you have any surplus cash, you can use it to prepay your Home Loan EMI. Prepayment allows you to repay your loan at the earliest. Prepayment can be done either for a part or for the entire outstanding loan balance. Prepayment of loan helps significantly lower the EMIs on your Home Loan. However, certain Home Loan providers levy a penalty for prepayment. Make sure you take these penalty charges into consideration when thinking of pre-paying your Home Loan.

Deciding on a loan repayment option is extremely crucial before applying for a Home Loan. Make sure you weigh all the pros and cons of the above-mentioned repayment options and choose the one that is in alignment with your future budgeting goals.

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