We explain how this scheme helps those who are expecting a higher income in the near future
In the case of this facility, the EMI portion is recovered in parts.
During the first few years, a lower EMI is to be paid. During the latter part of the loan tenure, the EMIs are stepped up (increased).
So, a higher EMI is payable during the later years. This way, the burden of repayment in the initial years is reduced on the borrower.
The lower EMI is made possible because of the step-up facility where the monthly payouts increase during the later part of the loan tenure.
Because a major chunk of the initial instalments is allocated towards interest, you can avail tax benefits for a longer period. Interest on the loan is a cost. Also, tax benefits reduce the cost of borrowing. This way, you can deploy your savings in other investments schemes which offer high returns.
The step-up facility involves a lower outgo in the initial years. Those who are likely to earn more in future can avail this facility to get a higher loan and adjust the cash flows over a period of time.
The facility is helpful for young borrowers, who intend to borrow early but at the same time do not have a high income and cannot afford higher EMIs in the initial years. Gradually, as the income increases, they can afford the higher EMIs.
In this scheme, you have to take on a higher interest rate risk if the loan is based on a floating rate of interest. A rise in the interest rate means that a portion of the interest will remain unrealized and added to the principal.
The principal repayment under the stepup loan may start immediately, reducing the interest rate risk. The process of step-up fa cility can be in different phases. In some cases, two phases are offered: one at a lower rate and the other at a higher rate. In other cases the step up can be a gradual process. It can be done yearly or every few years.
In case of a step-up facility, the in terest rate risk exposure is higher. In the initial years, the interest component is more and the principal com ponent is less. Lower EMIs in the initial years means a lower principal amount is being repaid.
This deferral of principal to the later part of the loan tenure increases the interest cost of the loan. This may turn out to be more expensive in case of a floating rate loan because in case the interest rate increases, the higher interest amount would have to be paid for a higher outstanding principal amount. In case of a rise in the interest rate, the difference is recovered through higher EMIs towards the end of the loan tenure.
Depending on the present and projected income of the borrower, one may opt for stepup EMI scheme. This way you can align the cash inflows and outflows better and purchase a house. QUICK BITES THE FACILITY IS HELPFUL FOR YOUNG BORROWERS, WHO INTEND TO BORROW EARLY BUT AT THE SAME TIME DO NOT HAVE A HIGH INCOME AND CANNOT AFFORD HIGHER EMIS IN THE INITIAL YEARS.
GRADUALLY, AS THE INCOME INCREASES, THEY CAN AFFORD THE HIGHER EMIS BECAUSE A MAJOR CHUNK OF THE INITIAL INSTALMENTS IS ALLOCATED TOWARDS INTEREST, YOU CAN AVAIL TAX BENEFITS FOR A LONGER PERIOD; INTEREST ON THE LOAN IS A COST [FAST FACT] DURING THE FIRST FEW YEARS, A LOWER EMI IS TO BE PAID, WHICH IS STEPPED UP DURING THE LATTER PART OF THE LOAN TENURE; THIS WAY, THE BURDEN OF REPAYMENT IN THE INITIAL YEARS IS REDUCED ON THE BORROWER