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Home Loan Repayment Options

If you thought the traditional method of equated monthly instalments (EMI) was the only way to repay your home loan, think again. There are scores of flexible options that the bank will make available to you for home loan repayments. For example, you can look at taking a break in EMI, reduced EMI for a short period of time, enhanced payouts when you have surplus funds etc. Sit down with your banker and explain your specific need and in most cases, they will adjust the home loan repayment deduction accordingly. It is a long term relationship after all! Let us look at some of these options.

1) Home costs create cash crunch – Ask for EMI moratorium

In a home loan, interest costs start piling up on disbursal and actual EMI starts once you take possession. A home entails a lot of additional costs, so you could find yourself in a cash crunch by the time you move in. That is where EMI moratorium can come in handy. An EMI moratorium is a holiday for 3 months to 6 months, so you have time to get your finances in order before your EMIs start. Most banks offer only 3 months tax holiday. This is needed if the bank is not funding the registration, stamp duty and other related charges.

2) Bet on the future – Go for Step-up EMI repayment

The step-up repayment entails small EMIs in the beginning and larger EMIs later. For example, if normal EMI works out to Rs25,000 per month, then the bank structures the EMI starting at Rs15,000 per month and stepped up every 3 years or so. Most people see income levels rise over time so this kind of step-up repayment allows you to postpone your liability to a future date. This should be adopted only if you really have trouble paying the EMI today. Otherwise, it is best to clear your EMIs early.

3) If you are doing well – Go for Step-down EMI repayment

Quite often, EMI affordability is not an issue, but people may want to get done with the liability early. In such cases, you can opt for step-down home loan repayment; the reverse of step-up repayment. In step-down, initial EMIs are large and subsequent EMIs are smaller. This works if you are earning well. The lower EMIs at a later stage will allow you to acquire a new property or plan your finances better.

4) Have cash on hand – How about prepaying your home loan?

Quite often, you get a large annual bonus, or some windfall gains on sale of shares. Alternatively, you may see inflows from an ancestral piece of land. Quite often, this is something you don’t expect and the question arises, how to use these funds? You cannot fritter it away in conspicuous consumption. One smart option is to prepay your home loan; either in full or part. Ensure no prepayment charges for loan closure. You also have an option of partial closure of loan, in which case, either home loan repayment deduction can be proportionately reduced or the tenure of the loan.

5) On known cash receipts in future, structure balloon repayments

Windfall gains are not anticipated. However, some inflows are predictable. You may have inflows after 5 years from a maturing insurance policy or ULIP or a long term FD. That is a predictable future inflow. When you can predict such inflows and provide evidence to the lender, the bank structures a balloon repayment. In this case, there are assured balloon payments which can be in one or more tranches. Based on this balloon payment, the initial EMI will be kept low. This works in case of assured inflows. However, you must be sure that you are going to use the funds for the balloon payment only.

Did you know that your loan can also be refinanced?

What do we understand by refinancing of loan? For instance, if your original loan was for Rs50 lakhs and after 5 years you have repaid Rs12 lakhs, you can get the home loan refinanced. Refinancing makes sense if the rates in the new loan are much lower. The new lender will first repay the old loan principal and the balance will be disbursed to you. The condition for such refinancing is that home equity must be positive; that means value of the home must be more than the outstanding balance. Quite often, your existing lender will also refinance the loan and approve a higher limit. The choice is yours, but this option is always available. To sum it up, deciding on the home loan repayment option and the home loan repayment deduction are critical decisions. The good thing is you have a variety of options to choose from.

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