Buying a home is one of the most important financial decisions that an individual takes in their lifetime. A lot of importance is given to searching the right home and getting the home loan on favorable terms. However, not much thought is given to the home loan repayment, other than availing income tax benefits.
You give a lot of attention to the rate of interest charged, but the style of repayment also plays a big role in reducing your EMI burden. Did you know increasing your EMI even by a small percentage is a proven trick to lower your interest outgo? Or making lump sum payments towards principal once in 2-3 years also helps a lot?
There are innovative home loan repayment options available for you in the market which could go a long way in easing your loan burden. It is worth researching and opting for these offerings rather than the normal ways of paying EMI’s.
Additional Reading: Check 5 ways to cut your EMI cost
Home Loans with Increasing EMIs: You receive a hike in your salary every year. So ideally your EMI’s should also increase by a similar percentage so that it helps you clear off your loan sooner. A home loan where EMI’s are periodically increased is called as a Loan with Step-Up EMIs. Loans of this nature are particularly useful for the individuals who are at the start of their career and looking to own a home. This loan assumes that your income would increase by a certain percentage over the period of the loan. Another advantage of Step-Up EMI loan is that it would allow you to borrow a higher amount as home loan. However, if your income doesn't go up as per the initial projections, then higher EMI’s might end up hurting your pocket.
Decreasing EMI Home Loans: As you have the option of stepping up your EMI’s, you also have the option of decreasing EMIs. These loans have higher EMI’s in the initial years which goes down as the term of the loans progresses. As EMI's are higher during the initial tenure, more of that goes towards your interest payment and during the later years, only principal is left for paying. In that case, it would be good if you can have a prepayment plan in hand. This kind of loan is suitable for individuals who have high earning capacity but are approaching retirement sooner.
Home Loans with Extended Tenures: Homes are mostly once/twice in a lifetime investment, so naturally you look to buy the best with all possible amenities. In these cases, many times, your income does not match up to the amount you are intending to borrow. You can get in a co-applicant which could improve your chances of a bigger loan. There is another option that comes to your rescue here, which is the home loan with extended tenure. The repayment period in this kind of a loan can go up to the age of 67. However, the borrower would need to pay an extra percent or two of the loan amount for loan guarantee provided by India Mortgage Guarantee Corporation (IMGC)
Additional Reading: How best can you repay your home loan sooner?
Delayed Start EMI Loans: These home loans come with a moratorium period during which there is no EMI charged. A preset date for EMI start is inbuilt into the home loan agreement. The moratorium period could last anywhere between 36-60 months during which only a pre-EMI is paid by the borrower. Once the moratorium comes to an end, the EMI’s not only start but increase over the period of time to compensate for the EMI break/holiday period. This option proves useful for individuals who are establishing themselves in their career but are sure of increased income after a certain period of time. However, an individual needs to be sure of their income going up during the period of enhanced EMI payment. As a precautionary measure, this kind of loans is lent only to salaried and working professionals.
Lump Sum Payments for Under-Construction Properties: When you go in for under-construction properties, the disbursements are made by the borrower to the builder as per the schedule. The borrower is only required to make interest payments to the lender. This is called as the Pre-EMI. However, if the borrower so desires, he can start making normal EMI payments for the amount disbursed during the under-construction period. The amount paid will be adjusted towards interest first and then towards the principal. If you opt for this kind of a loan, some amount of the principal gets repaid even before you get possession of the house. It eases your loan burden during the later years if you choose to prepay. However, you should bear in mind that there are no tax benefits for any payment (interest or principal) made during the pre-construction period. Only the interest paid during that period could be claimed in 5 installments (1 per year) after possession of your property.
Home Loan with EMI Waiver: These are loans offered by some banks where a fixed number of EMI’s are waived off after a certain number of regular EMI payments. It could be considered as a way of rewarding the borrower for being regular in his/her payments. For Example, Axis Bank has their Fast Forward Home Loan, where 12 EMI’s are waived off during the total period of the tenure. 6 months EMI’s are waived off after completion of 10 years from the date of first disbursement and another 6 are waived off after 15 years. However, there are stringent conditions pertaining to repayments.
Savings Bank Linked Home Loan Option: This kind of home loans is opened with a linked Current Account where you can park your excess savings, which could be withdrawn whenever you need. The amount held in the current account is accounted for while calculating the balance outstanding for your home loan. So, interest is charged for your principal outstanding minus the balance in your current account. This kind of an arrangement lessens your interest burden undoubtedly. However, you need to remember that current accounts do not earn any interest by themselves. You may be better off investing that amount elsewhere and using that amount to prepay your home loan. However, if you run a business, which requires you to operate a current account, this kind of home loan may prove useful.
All these options may not be available with a single lender. You would need to do your research based on your requirements, but at the same time, also consider other conditions like the processing fee, interest rates, and other administrative expenses charged by your lender before making a decision to go in for specially-tailored home loan repayment options.