Sanjeev Sinha | ECONOMICTIMES.COM | May 14, 2015, 02.52PM IST
NEW DELHI: Home financing companies these days are offering many customized payment options to suit your loan requirements. While some of these options give you flexibility in repaying your loan, others are linked to the various stages of your house construction. Overall, these plans are a win-win for both the lender and the borrower. In fact, some of these plans increase the repayment capacity of the borrower with some tax benefits.
Here are the different types of repayment plans prevalent in the market today, which a borrower needs to analyze before making a decision, based on his/her requirement:
1. Step-Up Repayment Loan: In this plan the repayment is directly linked to the borrower’s monetary growth (growth in income). This helps the borrower to avail higher loan compared to a normal housing loan.
“This scheme is beneficial for those who buy a house at a younger age. That is because one’s income increases as one moves ahead in career. Since people pay lower EMIs in initial years, they can adjust the loan as per their need and also enjoy the same tax benefit even if the EMI increases,” says Jitendra P.S. Solanki, a SEBI-registered investment adviser and founder of JS Financial Advisors.
2. Step-Down Repayment Plan: This is exactly opposite to the above option. Here, EMIs are higher in the initial years and decrease later. This plan is most suitable for people who borrow loan at an older age, i.e. mostly senior citizens or those nearing retirement. Since the income capacity alters at later stage, the lower repayment helps in keeping your finances within manageable limits.
3. Fixed and Flexible Installment Plan: In a fixed repayment plan, the EMI will be fixed for a certain period after which it gets adjusted as per the market rate. During this fixed tenure, the EMI is not affected by market conditions. It is beneficial for borrowers when interest rates are expected to rise. However, one needs to be aware as many lenders in their agreement do have provision of increasing the fixed amount.
Contrary to this, in a flexible loan installment, the EMIs are higher in the initial years, but decrease gradually in the later years of repayment. “This option can be good for parents who wish to buy houses for their children. The loan can be planned in such a manner that by the time they retire or are not in position to repay the EMIs, the children will be in a position to fulfill the liability,” says Solanki.
4. Tranche-Based Repayment Plan: Ideally a borrower has to pay interest on the home loan amount based on the stage of property construction till the project is complete. This type of repayment plan is offered by a few banks/lenders, which helps the borrower save interest. The borrowers can fix an amount as per their capability which they can pay in installments to the bank till the property is ready to occupy. The minimum amount payable is the interest on the total loan amount. Any amount over this fixed amount goes towards the principle. This way the borrower saves on the tenure of the loan by repaying the loan faster. This option is most suitable when you buy an under-construction property.
5. Accelerated Repayment Plan: In this plan borrowers can increase the EMI amount when they have surplus money or when the disposable income increases. Another option which is highly opted is paying a lump sum amount towards the loan. This helps in faster loan repayment and saves tax also.
6. Balloon Repayment Plan: This plan is similar to the step up option, but in this option you could pay a very small amount of installments in the beginning of the loan term. As the name suggests, in the later years of the loan term, the installment amount also starts ballooning to a higher amount than the normal step up option.
Although lenders may give you various loan repayment options as a borrower, you have to do some due diligence to ensure that any chosen option does not go against your expectations.
“The most important thing is to check the clauses the lender has in the repayment plan you are opting for and how the lender has treated its existing customers. Even speaking to any existing customer is not a bad proposition knowing that you have your life-time savings invested in your dream home and borrowing credibility need to be kept good,” observes Solanki.