Home Loan Repayment

Home loan repayment is when the borrower repays the amount taken by the lender, along with the interest charged. A home loan is usually repaid over a period of 10 to 40 years in EMIs (Equated Monthly Instalments) as per the amortisation schedule decided by the lender.

When you repay a home loan, you do not repay just the amount you borrowed, but also the interest charged by the lender. While the rate of interest varies from lender to lender, it is also determined by numerous other factors such as your credit score, monthly income, other liabilities, and more.

 

If you wish to repay the loan through a standard monthly repayment schedule, the example below will help you understand how the repayment works. 

 

Example: Let’s say you take a home loan of ₹10 Lakhs with an interest rate of 6.5% p.a. for a tenure of 5 years. Now, you will have to pay a fraction of the principal amount and a fraction of the interest amount every month as per the amortisation schedule (EMI schedule) decided by the bank. 

 

The following table illustrates how much of the principal amount and the interest amount you will be paying to the bank every year:

Aside from the regular monthly repayment schedule, there are other ways to repay your loan. In most cases, you are allowed to make some changes to your repayment schedule as per your financial needs and convenience. 

 

For example, you may choose to repay your entire loan much before the scheduled date or pay a higher EMI at the beginning or towards the end of the loan tenure. Following are some of the home loan repayment options that you should know about:

• EMI Holiday

Some home loan providers offer an EMI holiday at the start of your home loan repayment. This EMI holiday is nothing but a delay in the deduction of EMI from your bank account by a few months after the disbursal of the home loan. 

For example, a 3-month EMI holiday would allow a borrower to start paying instalments after 3 months of availing the loan.

• Step-up Repayment

A step-up home loan repayment option involves an eventual increase in the EMI amount as the tenure progresses. This means that during the initial years of repaying your home loan, you will have to pay a lower EMI, and the amount will increase as the loan tenure progresses.

• Step-Down Repayment

Step-down repayment is the opposite of step-up home loan repayment. Here, the borrower sees an eventual decrease in the EMI amount as the loan tenure progresses. 

This means that during the initial years of the repayment of the housing loan, you will have to pay a higher EMI. However, the amount will eventually decrease as the loan tenure progresses.

• Balloon Repayment

 In the case of a Balloon home loan repayment, the borrower makes a large payment (around one-third of the loan amount) as the last instalment. A balloon loan is ideally taken for a shorter term, where the final balloon payments tend to be almost twice the size of the initial instalments.

 

In this loan repayment option, a small portion of the home loan’s principal balance gets amortised over time.

• Refinancing

Refinancing a home loan involves repaying the outstanding balance of the existing home loan by availing of a new loan. This new loan generally comes with a lower home loan interest rate and better repayment options, so that the borrower’s repayment capacity is not hampered. A borrower can also negotiate a shorter tenure on the new loan for refinancing.

• Prepayment

If you have surplus funds at any point of time during the loan tenure, you may choose to repay your home loan (either in part or in full) before the completion of the tenure. Prepayment of a home loan helps lower the EMI of the loan significantly. However, certain home loan providers levy a penalty for prepayment. 

 

Research these methods thoroughly prior to opting for a repayment option. Make sure that the option supports your financial requirements and monthly expenses.