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Step-up home loan is an innovative financing option that allows you to begin with lower EMI payments and gradually increase them over time. However, you need to pay equal instalments for interest along with the principal amount in a traditional home loan.

For young professionals and growing families who expect an increase in their income in the future, this option is a viable one. Remember, the lower EMIs applicable for the first few years increases your debt obligations for the remaining part of the tenure.

How Step-up Home Loans Work

The repayment option on this financial product depends on your expected rise in income. The lender keeps your EMIs low for the first few years i.e. only the interest is charged initially and increases them over time as your income rises.

Check out the following example to understand how step-up home loans work. 

Say you apply for a loan amount of ₹40 Lakhs for a tenure of 20 years at an interest rate of 8% p.a. If you choose a regular loan, the EMI will be approximately ₹44,822. 

This is not so in the case of a step-up loan. Paying only the interest component first, you will be paying a reduced EMI of ₹33,333 for the first 2 years, which then increases to ₹43,748. You need to pay this amount for the next 18 years.

While the EMI for the first 2 years is decreased by 20.30%, you can see an increase of 4.60% on EMIs over the next 18 years. See the table below to understand it better. 

Loan Amount

₹40 Lakhs


20 Years

Rate of Interest

8.00% p.a.

EMI Amount on Regular Loan


Step-up Home Loan EMI (For First 2 Years)


Step-up Home Loan EMI (For the Remaining 18 Years)


EMI on Step-up Loans as Compared to Regular Loans (For First 2 Years)

Reduced by 20.30%

EMI on Step-up Loans as Compared to Regular Loans (For the Remaining 18 Years)

Increased by 4.60%

Disclaimer: The above calculation is for illustrative purposes only. Your actual EMI amount and home loan terms will vary depending on the lender’s policy.

Types of Step-up EMI Home Loans

While these products offer lower initial EMIs, there are different classifications. Each of these caters to your specific needs. These include:

  • Interest Servicing Construct

These loans offer a moratorium on the payment of the principal amount in the first two years. It means that you only have to pay interest amounts as EMIs in the initial repayment period. 

  • Term Loan Construct

You can repay in regular EMIs (principal + interest) for a residual tenure after the interest servicing period

Pros and Cons of a Step-up Home Loan

As lenders also consider the potential for increasing income, you can enjoy an enhanced probability of approval. Another advantage of this option is that it allows you to qualify for a larger loan amount. While young professionals can become eligible for home loans early, they also get to enjoy tax benefits u/s 24 of the Income Tax Act.

While there are a few advantages that you can enjoy with step-up loans, there are a few limitations as well. You will end up paying more as interest payments can increase over time. Also, there can be a higher risk of default if your income does not increase as expected.

Another major drawback of step-up loans is that your interest payments can rise based on market fluctuations. This is possible if you opt for floating interest rates.

Many lenders offer this finance facility to make homeownership more affordable. You can use the step-up home loan calculator to determine your eligibility and understand the EMI structure. This will help you choose the right option and keep borrowing affordable.

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