With escalating real estate prices, Home Loans are becoming a substantial source of finance for home-buyers looking to purchase their dream home. As each homebuyer has a different financial background and requirement, lenders offer them a variety of options to repay their loans.
Before you opt for one, you should figure out the best Home Loan repayment option for you. Additionally, opting for the right bank and Home Loan plan is also instrumental. Financiers like Bajaj Finserv offer 3 EMI free months on Home Loans to facilitate ease of repayment. You can also apply online for your Home Loan to enjoy easy and fast processing. With Bajaj Finserv you get one of the lowest Home Loan interest rates with 5 minute approval facility on online applications.
Usually, Home Loan repayment in India boasts of customised options that are based on a borrower’s capacity to pay EMI at different stages throughout their life. Factors considered while deciding a borrower’s repayment option are age and monthly income of the customer, stability of employment and any other debts that are being serviced by them. Let’s explore the different types of Home Loan repayment options that are popular in the market.
Different Types of Home Loan Repayment Options:
Step-up Repayment Plan
This repayment plan is for people who have just started their careers. Here, the bank schedules the EMIs in a proportionate accelerating pattern, in accordance with the assumed increase in the customer’s income. A step-up loan helps the customer with an affordable EMI during his early job years.
Step-Down Repayment Plan
This repayment plan is also called Step-down Repayment Option and is a customised plan for individuals who expect a decrease in income during latter half of the loan tenure. This plan is beneficial for applicants who will retire closer to the end of the loan tenure. Here, the EMI subsequently decreases in proportion to the reducing income of the buyer.
This plan also helps youngsters by offering them an option to combine the income of their parents with their own income to avail a higher loan.
Tranche EMI for Under-construction Property
Tranche EMI is a repayment option available only for very large loan amounts. Here, the loan is disbursed in instalments over a long period of time.
Normally, the customer will have to pay a pre-EMI (interest for the amount disbursed) till the full loan amount is disbursed. Hence, this plan is offered to customers who can start paying EMIs soon after the first disbursement. As compared to other plans, the loan repays faster with this repayment option.
A balloon payment is a large payment made either at specific intervals or at the end of a long-term loan. This repayment option is vaguely similar to a step-up repayment plan, but the major difference is that more than one-third of the loaned amount is paid in latter half of the tenure. This scheme is advantageous only if the financial requirement of the customer is high.
Just knowing how to choose best Home Loan repayment option isn’t enough, choosing a suitable Home Loan plan is equally important. Consider an option that provides ease of repayment with a few extra incentives. Home Loan scheme offered by Bajaj Finserv proposes benefits like nil foreclosure charges and prepayment facility..
Fixed Interest Rate:
A ‘fixed’ interest rate is one that remains consistent throughout the entire tenure of your loan. There a few variations of fixed Home Loans available, offered by banks and other financial institutions. Once such option is a semi-fixed type, wherein the interest rate remain static for 2-5 years, after which the current floating rate of interest is applicable.
Though this type of loan is appealing, there are some drawbacks. Fixed loan schemes are generally priced 1-2% higher than floating loans. Additionally, some lenders may demand additional payment is you decide to foreclose on your Home Loan. Others, like Bajaj Finserv, offer low or free foreclosure options, which allow you to get out of the agreement without incurring additional debt.
Floating Interest Rate:
This is one of the most popular Home Loan options for first time buyers. In this type of scheme, the rate of interest varies according to the economic climate. The interest rates are dictated by the PLR system and the Base Rate System, used by financial institutions and banks respectively.
When there is a dip in the market, there should also be a corresponding decrease in interest rates.
These variable Home Loans are the most sought-after Home Loan options in India as they have viable prepayment options, which allow you to finish repaying the full amount faster without incurring any penalty.
What You Should and Shouldn’t do
If you prefer paying off your debt faster, these do’s and don’ts of Home Loan prepayment should make for an interesting read.
Should You Prepay?
The Home Loan prepay option is an ideal choice if you want to decrease the tenure of your loan. The reason this facility is popular is because, in the long run, the amount you are charged as interest decreases if you pay a lump sum. The earlier you pay, the higher your savings
If you do decide that prepaying is your best option, then the below pointers are important to keep in mind.
Prepay Without Recalculations
Do the math and see if making prepayments is beneficial to you. Not all cases result in you coming out on top, so make sure you do the research before you go through with it.
Overlook Tax Benefits
Repaying a Home Loan makes you eligible for interesting tax rebates for the principal as well as the interest. Again, look into what prepaying would do to those benefits and make a choice based on the results.
Prepay Entire Loan
Don’t take the prepayment route for the entire loan amount. Look at partial payments, till a time when the interest is lesser than the amount it would fetch if invested elsewhere.
The earlier you pay in your tenure, the more beneficial it is to your bank account. The initial EMIs are usually designed to cater to the interest component of a loan payment.
Regulate Your EMIs
When you prepay a loan, then you are given two choices – you can either reduce the EMI and continue with the same proposed tenure after paying, or you can keep the EMI and reduce the tenure. When given this choice, opt for the same monthly payment if you are comfortable with the specified amount. This way, the tenure significantly reduces, which means you will invariably resolve your debt sooner rather than later.
Keep Your Documents Ready
When you’re prepaying a loan, you may be asked to produce an ID proof, address proof, and income proof. Little research on the financier, would list out the documents required.
The Home Loan Prepayment Calculator
Easily accessible on the web, a Home Loan Prepayment Calculator may serve as the best tool for your Home Loan related calculations. By using one, a debtor may gain invaluable insight on important questions like:
- Is Home Loan part prepayment a good idea?It is more likely to be a good idea, provided the debtor makes a prepayment off the principal amount during that period of the tenure when he/she is entitled to pay the maximum interest rates. Though the interest rates may differ widely as per the specifications of the loan, most debtors are likely to benefit more if they start the Home Loan prepayment procedure at the earliest possible opportunity.
- What are the Current Home Loan Prepayment Rules?This piece of information is indispensable for debtors who have taken, or are willing to take, a Home Loan. A conscious and deep understanding of the specific rules set forth by their respective creditors is of utmost importance in order to be able to abide by the norms of the transaction.Most Home Loans allow the scope of pre-payment; however, it is the discretion of the debtor to be able to judge the value that he/she may attain out of it. The value would differ as per the contributing factors like fluctuating interest rates in the market, current cap on taxable interest charges and the amount levied by the creditors in the guise of a Home Loan prepayment penalty.
- What are the pros and cons of prepayment as opposed to regular payment of EMIs?The pros and cons would differ from those that come along with the regular payment of EMIs. Pre- payment is best availed with the intention to decrease the liability and should therefore be done only when a debtor is perfectly capable of doing so.
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