Home loans are one of the most popular forms of unsecured credit in India. The growth rate of the home loan sector is estimated to reach more than 18% by the end of FY 2019. It has an estimated market size of Rs. 28 Lakh Crore. Coupled with the growth rate, the valuation of this sector is projected to go even higher.
Importance of Home Loans
There has been a substantial price hike in low to mid-range real estate in recent years. This has led to the question of whether middle and lower-income groups will be able to purchase residential properties.
In a scenario like this, home loans have facilitated many salaried and self-employed individuals to realize the dream of owning a house.
Home loan repayments also strengthen the economy by generating income within the country and boosting the real estate sector.
Also, there are numerous other lesser-known benefits of home loans that make them so popular.
Before deciding to avail a home loan, it is your duty to run an analysis of the repayment strategy. You can save a lot of money on your loan by learning about the right repayment strategies.
Using a home loan repayment calculator can help you understand which strategy is best suited for your needs.
Repayment of Home Loans in India
Home loans can be repaid in multiple ways. Remember, the longer your loan tenure, the higher will be the cost of your loan. Therefore, a shorter tenure is always desirable. Paying home loan repayment EMIs within stipulated due-date also helps to improve your credit score.
You can also choose to prepay your loan. Most financial institutions charge prepayment fees. However, some non-banking financial companies (NBFCs) provide Home Loans with multiple borrower-friendly features like zero part prepayment and foreclosure charges.
Listed Below Are Various Types of Repayment Methods on a Home Loan:
- Moratorium Period Terms: If the home loan comes with a moratorium period, the borrower is exempt from paying any EMI for a fixed period. This period generally ranges between 36 to 60 months and is known as the moratorium period. The borrower is only expected to pay the pre-determined interest. People with guaranteed future income should opt for this payment method.
- Step-Up Repayment Plan: In this method, the EMI increases with the passage of time. This means that the EMIs will be less in the first few years of the tenure and increase with time. Use a home loan repayment calculator to know how much your EMIs will increase under this method. Only people who are sure that their income will increase in the future should opt for such repayment terms.
- Step-Down Repayment Plan: This method of repayment is designed in a manner where the EMI amount decreases over the home loan repayment schedule. In the initial years, the EMIs will be quite high compared to the later payments. This method is also known as a flexible instalment method and is most suitable for individuals who are nearing retirement.
- Balloon Payment Method: In this method, the borrower is expected to pay a lump-sum amount of money after fixed intervals. This payment is made generally after intervals of 5 years or during the end of the tenure. This method entails a high cost of the loan as the interest payable is much higher compared to other plans.
- Tenure Specific Repayment Method: Depending on the tenure of the loan, repayment methods also vary. A longer tenure will entail higher total interest cost whereas shorter tenures have lower cost as interest payable is for a shorter period of time. However, note that shorter tenures will increase the EMIs and higher tenures will decrease them. Learning how to trim your home loan tenure will help you a lot.
- Lump-Sum Payment Method: In this one, the borrower is entitled to pay only the interest in case an under-construction property is purchased. He/she will have to pay the principal in a lump-sum amount later.
You can evaluate all the methods using a home loan repayment calculator. You will be able to make an informed decision about the plan best suited for you only after a thorough evaluation and analysis.