Buying your dream house could be a tedious process and will require you to do some serious research. First, you need to go and look for all the options available within your budget. You then need to consider the financing options you would be eligible for. Scouting for the best home loan is not easy. You will have to weigh all the options available and compare the home loan interest rates, documentation procedure, prepayment fee, and other charges. You also need to look into the kind of loan that would be the best fit for your financing needs.
Furthermore, you’d also have to pay close attention to the repayment of your loan. The rule of thumb when it comes to repayment is that the earlier you’re able to pay back the home loan, the more money you’d save on interest. Lenders often provide multiple repayment options so that the borrower has the flexibility of picking one that best fits their financial status. The Reserve Bank of India provides an easy list of FAQs for first-time home loan seekers* that describes all the common queries such as home loan eligibility, how home loan rates are calculated, various charges incurred and more.
Here are some popular and the best repayment options you can consider when repaying your home loan.
- Relaxed EMI payments
Some home loan providers offer a relaxed EMI payment option at the start of repayment. There is a delay in the deduction of the instalments by a few months from your bank account after the disbursal of the loan. Depending on the loan provider you have chosen, you can get anywhere from 3 months to a year of EMI holiday to start the repayment procedure after availing the loan.
Relaxed EMI payments offer considerable relief during the initial stages as borrowers have to spend a considerable amount in clearing stamp duty and registration fees. This repayment option offers respite to the borrower to get their finances in order and plan the repayments of future EMIs in a much efficient way.
- Step-Up Repayment Option
This option involves an increase in the EMI value as the tenure of the loan repayment progresses. This implies that during the early years, you will have to bear fewer EMI expenses and the amount will gradually increase with time. The step-up repayment option is ideal for borrowers who have just started their careers and are looking for time to settle down.
During the initial months, they may not have enough funds to contribute to huge EMIs. However, as and when their career progress, their financial prospect will start improving and they would be able to afford the increase in the EMI payments with much ease. Leading banks in India including ICICI and HDFC banks both offer this facility to the borrowers.
You need to remember that it is not easy to predict the future. If there is any event that can adversely affect your income and if the circumstances get beyond your control, you will still have to pay higher EMI as the loan tenure progresses.
- Step-Down Repayment Option
This option is the complete opposite of the step-up repayment option. In this plan, the borrower will experience a decrease in their EMI value as the loan tenure progresses. This implies that during the initial years of loan repayment, you will have to pay a higher amount towards your EMI which will decrease substantially over time.
This loan repayment option is ideal for borrowers who are close to their retirement. It would be easier to pay high EMIs when you have a steady source of income. Eventually, when your income decreases after retiring, you would be required to pay lesser and lesser EMI amounts thereby lowering your financial burden.
- Lump-Sum Repayment
This housing loan repayment payment mode is a great option for borrowers who plan to repay the loan amount as soon as possible. If you are borrowing a home loan for projects that are still under construction**, then the loan amount would not be disbursed at once. It would be cleared in instalments as the construction work progresses. In such cases, the borrowers will have to pay interest on the amount drawn until the full loan amount has been disbursed. It is only after the disbursal of the final instalment that the borrower will have to pay the EMIs.
If the borrower wishes to repay the principal amount as soon as possible, then they can start paying EMIs on the disbursed cumulative loan amount. The lump-sum payment made would be adjusted for interest while the balance would be utilized for clearing the principal amount.
- Balloon Repayment Option
This repayment option works similarly to the lump-sum payment option. However, the borrower under this option makes one large payment towards the last instalment. This loan is usually opted for a shorter-term where the final payments tend to be twice the size of the installments made during the initial periods of the loan tenure. In this repayment plan, a small value of the principal balance gets amortized over time.
Refinancing involves repaying the outstanding balance of the existing home loan by availing a new loan. This new loan comes with lesser interest rates and better repayment options. This doesn’t hamper the repayment capacity of the borrower. Opting for a new loan that is affordable and comes with lower home loan rates will also lower your EMIs. Also, the borrower can try to opt for a shorter tenure on the new loan. Transferring the pending balance on your home loan to another provider can also help you boost your credit score.
If you have surplus cash, then you can utilize it for pre-payment of your home loan EMI. The prepayment option allows you to repay your loan as early as possible. It can be done either for the entire outstanding loan balance or a part of the principal. Choosing this option results in a significant reduction of EMI on your loan. However, certain loan providers may charge a penalty for pre-payment. You will have to bear the prepayment charges and consider them while choosing this repayment plan.
Deciding which loan repayment option is extremely crucial and should be in sync with your financial situation. You need to make sure that you weigh the pros and cons of all the kinds of repayment options available and go ahead with the one that aligns with your long-term goals.