Which EMI method suits you under a home loan?

A home loan plays the role of a key enabler for the people who want to buy a home. As the home loan amount happens to be huge, the banks allow a long repayment tenure to the borrower to reduce their EMI load. Due to long repayment tenure and big loan amount, even a slight change in the interest rate can significantly increase the total amount payable on the loan. So, the borrower must select the correct EMI option while taking a home loan.

“Choices in the types of housing loans and the variety of repayment options have increased the flexibility for customers. One has to look at specific options best suited to them, the expected income, and also take a view on likely movements in interest rates over the tenure of the loan,” says Mr. Jeevandas Narayan, MD, Manappuram Housing Finance.

 

Here, we list out a few of the home loan EMI options available in the market and the factors for consideration while evaluating the various options.

 

Deferred EMI / Flexi pay

In this option, the customer gets to delay the start of EMI payments. Such a choice is beneficial for customers buying under-construction properties, as the burden of both Rent and EMI may be overwhelming in the initial period

“While the EMI starts after moratorium period, the interest accrues from the date of disbursal onwards, customers should choose this option, only when they intend to stay in the new property and are currently living in a rented property,” explains Mr. Narayan

NBFC/Banks offer a different version of this option; in some variants, they would ask only for the interest repayment during the moratorium period; some may not ask for any payment. It is better for a customer to at least pay the interest to avoid further building up of the liability

Full-EMI payment option

“Under this option, buyers may start paying the EMI earlier, which means buyers start paying principal even before the project is complete, and while it’s a drain on the reserves, it is a better thing to do than delay principal payments as long as possible,” suggests Mr. Rituraj Verma, Partner at Nisus Finance

Increasing EMI / Step-up option

Sometimes the homebuyer has a stable career and excellent capacity to earn high income in the future, but the current income is not suitable to repay home loan EMI. Increasing EMI or step-up EMI options can suite well to such borrowers. Increasing-EMI option helps in taking on higher loan amount with lower initial EMI, which increases after a few years (step-up). This facility helps in keeping the outflow lower in initial years and increases later, generally coinciding with the higher income, which will accrue to the borrower over time.

A home loan with overdraft facility

This option is available only through the banks, as NBFCs are not allowed to offer banking facilities. Under this option, customers can link their bank account with the home loan account and park any short-term surplus amount, thereby reducing their interest cost. As the account allows for the withdrawal of extra deposited funds as and when required, it helps customers in effectively utilising their bank balances. Please note that the facility is beneficial if often you have surplus funds to deposit (even if for shorter periods), as these loans carry higher interest rates than the ‘plain vanilla’ home loan products.

 

Different tenure options

While choosing the EMI options, the lender also gives loan products with different tenures. According to experts, lenders offer home loans for tenures ranging from 10 years to nearly 30 years’ tenure, depending on the age and expected working life. Longer repayment tenure allows one to borrow a higher amount, and it also increases your repayment liability for a longer period.

Some lenders also offer EMI waiver option on successful repayment for specific years, as an incentive to retain the customers and encourage prompt payments.

 

EMI options under different situations

The availability of choices may sometimes create confusion in the mind of the potential borrower as to which option he should choose. Here, then, are a few tips which will help in making the right choice:

• If you expect to receive significant bonus amounts annual/semi/quarterly/monthly, then use it to repay the loan. As there are no prepayment penalties for repayment from your sources, one should use this option as and when available.
• If the interest rates are to rise over the next few years (i.e., an increasing interest rate scenario), then it is better to choose the Pre-EMI option as you are likely to reduce your overall outstanding before the higher interest rates kick-in.
• When you are purchasing under-construction property and wish to delay the EMI payments, then the Flexi EMI (differed EMI) option is best suited. As while the property is under construction, you may opt for no-EMI of just interest-EMI on the outstanding balances and start the full EMI option on taking the possession of the property.
• In case of irregular income (like entrepreneurs, professionals, etc.) the full EMI option is best suited, one may opt for a longer tenure (as there is no retirement age restriction for professionals) and keep EMI amount low. In case of higher savings/earning during a specified period, the customer may choose to park this fund for EMI repayments in the future.

 

So, when you go to a bank to apply for a home loan, then remember that you have various EMI repayment options available to choose; so, select the one that suits you best according to your financial capacity!