Mode of Payment

There is more to home loan repayment than the traditional EMI option

For all intents and purposes a home loan, which has two components principal and interest is repaid through EMI (equated monthly installment). However, in terms of loan repayment options, there is a lot more a borrower ought to know about home loan repayment other than the traditional EMI option.

To honor its claim we are all about clients, AGNI Estates believes that the first thing a borrower must know is that lending institutions (Banks and Housing Finance companies) have a large basket of EMI options on offer. Thus, loan repayment is not a one way street, and a borrower has the freedom to choose from a basket of EMI options. It is therefore essential for a borrower to clearly understand the difference in scope of the various EMI options, before making a commitment.

In today's age of customization, a borrower's inquiry about EMI options offered by a lending institution may find answers such as Accelerated EMI, Tranche-based EMI, or Step-up EMI. Such answers may sound jargon-like and unfamiliar. However, these are all well-designed EMI options, linked to the financial goals and cash flow patterns of specific borrower profiles.

The EMI options described below highlight how they differ from the traditional EMI option under which a fixed amount is paid every month. The traditional EMI option has a high principal component and a relatively low interest component, resulting in a high EMI.

Borrower profile linked EMI Options

Flexible Installment Plan

This repayment mode is for fully disbursed home loans, and suits borrowers whose incomes will reduce after a certain time period of a loan tenure

Pre-EMI

This repayment mode is for fully disbursed home loans, and suits borrowers whose incomes will reduce after a certain time period of a loan tenure

Flexible Installment Plan

This repayment mode is for partially disbursed home loans where the borrower has availed only a part of the loan; in this option only interest is paid on the amount disbursed till the full loan is availed; the option is known as pre-EMI interest (PEMI) and is payable monthly till the final disbursement is made, after which the EMIs commence

Under-Construction EMI

Tthis repayment mode EMI is for projects under construction and enable borrowers to commence their EMI toward a partly disbursed home loan; this mode ensures repayment toward the principal amount resulting in interest savings and faster repayment of a loan; in this mode, the borrower has the flexibility to pay either toward the part disbursed amount or the sanctioned loan amount

Accelerated repayment scheme

This repayment mode is for those who want to finish repaying their loans in as short a time period as possible; this mode accelerates the EMI every year in proportion to the increase in the borrower's income; a borrower opting for this mode will save on interest because of faster repayment

Tranche-based EMI

This repayment mode is for property under construction and helps a borrower save on interest payment by fixing installments until the property is ready; in this mode the minimum amount a borrower pays is only the interest on the loan amount drawn, based on the level of construction; any amount a borrower pays over and above the interest is set off toward principal repayment; in this repayment mode, a borrower benefits by starting EMIs earlier and hence finishes repaying the loan faster

Step-up EMI

This repayment mode is particularly useful for young borrowers whose incomes go up with time as the EMI is linked to their expected growth in income; in this mode young borrowers can get large amounts, yet pay lower EMI in the initial years of a home loan tenure as the loan repayment is linked to expected growth in income and stepped up proportionately; however, in this mode the borrower takes on a risk of interest escalation if the home loan is based on a floating rate of interest; a rise in interest rate means a portion of the interest remains unrealized and is added to the borrower's principal; interestingly, there are mitigating factors in this mode-since a large part of the initial installments goes towards interest payment, a borrower can avail tax benefits for a longer period, thereby generating savings that bring down the cost of capital; secondly, with increasing income, a borrower will be able to afford a higher EMI and close the loan earlier, leaving him/her with surplus funds to explore alternative investment options

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