Home loan eligibility using ‘step up’ EMI plan increases eligibility

Lenders offer various options to make the repayment on a home loan flexible and convenient for borrowers. One of them is the ‘step up’ EMI facility.

Today, most home buyers are faced with a dilemma. With property prices having reached dizzy heights and interest rates on home loans touching sky-high levels, most of them find their dream home beyond their reach. Borrowers may compromise and settle for a smaller house, stretch their budget somehow or postpone the purchase of the home. Borrower need not do either of these. Borrower can go right ahead and buy that dream home without having to stress his budget any further by making use of the step up repayment facility offered by lenders.

A step up loan is one where borrower can pay a lower Equated Monthly Installment (EMI) during the initial years of repayment and gradually increase the EMI as the tenure progresses. Put simply, it is a loan option where the lender takes into account borrower’s expected growth in income and provides borrower with a repayment schedule which is linked to this increase in income. In short, borrower can stagger his repayment on the home loan in a way that monthly payments are lower in the first few years. Depending upon the lender and the loan amount that borrower have taken, the EMI will be increased in pre-determined stages.
A step up loan can prove to be an ideal alternative for those of borrower who wish to buy a home but cannot afford a high EMI in the initial years. There are various benefits of this option such as:

Increases borrower’s loan eligibility:
Under a step up loan, lenders usually calculate the loan amount based on a lower EMI for the initial years. This lower EMI helps to increase borrower’s capacity to borrow and hence borrower can avail of a larger loan amount. In addition, borrower’s future earning potential is factored in to further increase borrower’s loan amount.

Reduces the initial repayment burden:
Since borrower’s EMI contribution in the first few years of repayment will be lower under this option, it will help borrower in managing borrower’s cash flows efficiently without bearing a financial burden.

Borrower can maximize his tax benefits on interest paid:
The interest component constitutes a larger part of the EMI during the first few years. Under this loan type, since the payment of principal is deferred, borrower can avail of tax benefits on the interest amount optimally during the initial repayment period.

The step up facility is generally available only to salaried individuals and professionals who are stable in their careers or jobs and who have better job prospects and definite chances of salary hikes in the future. While determining the expected increase in salary, lenders take a call based on various factors such as borrower’s present income, educational background, type of job, etc. Depending on these parameters, borrower’s loan eligibility can go up by as much as 30 per cent. However, under the step up facility, lenders fix a minimum loan amount and if borrower wishes to borrow a lesser amount, then borrower will not be able to make use of this facility.

One drawback of this scheme is that the interest rate risk exposure is pretty high. This is because, in the initial years of repayment, the interest component is relatively larger whereas the principal is much lesser. Also, a lower EMI means that an even lower amount of principal is being repaid. In this scenario, if the interest rate increases, borrower will be required to cough up a greater interest cost since the principal outstanding on the loan will be higher than that on a regular home loan.

This product suits borrowers who do not have a large disposable income at present and who wish to buy a home at an early age. At the same time, borrowers who anticipate a regular annual rise in income are ideally suited for this loan variation. Based on borrower’s individual requirements and needs, borrower can decide whether this loan option is suitable for him.