Ready to take a home loan? The bank may recommend a particular EMI scheme as the best, but one should look at the loan agreement for details before signing on the dotted lines
Bear in mind, very little is known to most people about the different EMI repayment options beyond what the banks recommend to you when you take a home loan. Banks and home financing companies such as SBI, HDFC, HSBC, LIC Housing Finance and others may have one or many options that they may recommend as the right scheme for you. The criteria taken into account by the loan-giving agency include age, income, saving history, educational qualifications, job profile, number of dependants, type of property (including the builder) and so on.
Here’s what you need to know about different EMI options available in case you are planning to take one.
First things first. The simple ground rule for all EMI options is that the longer the term of your loan, the smaller will be your EMI. The EMI also has two components — principal and interest payments. The most common repayment option availed of by most home loan customers is still the traditional normal EMI option under which a fixed amount is paid every month. With the amount to be deducted steady, there is a regularity to the remaining amount that is available for use. The customers can thus plan their cash flow. However, the payment towards the principal is quite high and the amount towards interest is comparatively low, which effectively means a sufficiently high EMI.
The customised options or the newer schemes work on the principle of lower principal repayment and higher interest payment within the EMI. Some banks offer to structure EMI options entirely around the needs of their customers. Many of the options are available only for professionals such as doctors, lawyers, chartered accountants and so on, given their propensity of increase for this category.
Among the options available, the step-up repayment option is ideal for those who envisage a growth in income in the course of their repayment schedule. This would be a good option for those at the beginning of their career, with the possibility of climbing the ladder. While they pay lower EMIs initially, they are gradually stepped up at intervals, which vary according to the term of the loan.
There are also those who want to finish repaying their loans in as short a time period as possible. For such individuals , there is the option of accelerating your EMI every year in proportion to your increase in income. The customer then does not have to pay interest for the remaining term. Moreover, with the loan off his hands, he also has the chance to park his money in alternative investment options. But the case may not be so with a slightly older person, particularly someone near retirement or someone whose repayment capacity is likely to alter. One could take the case of a couple with a home loan for 15 years where the husband will stop earning after the 10th year. In such cases, the flexible loan installment plan makes a way for a person to pay a high EMI during the earlier years which then decreases according to the reduced income.
EMI payments generally begin only after the entire loan amount has been disbursed. In the pre-EMI stage, the customer is charged only simple interest on the amount disbursed. However, there are a few customers today who want to start their EMIs on partially disbursed loans and when their homes are still under the process of construction. This option is generally referred to as Tranche EMI. However, tax implications are very different from what is available for regular EMI payments.
Many people in India, however, take a home loan for the tax benefits involved. The longer the term of the loan, the longer one can avail of the tax benefits. Tax deductions up to Rs 1 lakh are available on loan repayments. There is also a deduction available if the house has been rented out during the period of the loan.
Customers who feel they are unable to pay the current EMI option should talk to the bank to see if they can switch to another scheme. Some banks allow the customers to switch, provided they have the credibility of savings and are able to repay the loan according to the new option.
KNOW YOUR OPTIONS
- Regular EMI: Pay a fixed EMI every month for the entire term of your home loan
- Step-up repayment option: Pay a lower EMI in the initial years and a higher EMI in the later years. EMI is stepped up at regular intervals
- Acceleration of EMI: Increase your EMI every year to finish paying off your loan faster
- Flexible Loan Installment plan: Pay a high EMI during the earlier years and a lower EMI in the later part of the term when there is a possibility of decrease in income
- Flexible Loan Installment plan: Pay a high EMI during the earlier years and a lower EMI in the later part of the term when there is a possibility of decrease in income
