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Fixed Rate, Step-up, Pre-EMI or OD: Which Home Loan Repayment Plan Suits You?

Adhil Shetty

Buying a home is often the biggest investment of our lifetime and is a dream that most can’t afford without the assistance of a home loan. People usually put in a lot of research while selecting a house, but they also need to exercise similar strict due diligence while choosing a home loan product.

Many of you would be aware of the recent RBI directive to banks to link their retail loan lending rates to an external benchmark like the repo rate. Also, the lenders have been asked to revise their rates at least once in three months. The central bank took this step in October last year to ensure lenders quickly transmit the benefits of a cut in the key policy rate to borrowers. Following suit, most banks have started linking the rates of their new home loans to the repo rate while a multinational bank had already linked its lending rates to the 90-day Treasury bill.

That being said, there are different types of home loans available in the market apart from the repo-linked loans depending on not just the interest structure but also the loan size, tenure, repayment characteristics, etc. and the borrowers need to make an informed choice to find the right financing match to their requirement. So, if you’re planning to take a home loan, you’ll be well-advised to read on as we’ve discussed a few major types of home loans apart from the popular floating rate home loan products.

Fixed-Rate Loan

If you are looking for a loan for a short to medium-term, i.e., between 3 to 10 years, a fixed-interest rate loan can allow you the comfort of constant EMIs without having to worry about interest rate fluctuations. For ultra-long loan tenures, i.e. 20 to 30 years, the floating rate loans are better as they tend to average out the rate fluctuations and hence help in diminishing the interest rate risk.  While fixed rate loans provide some advantages in the short to medium term, remember that there may be pre-payment and pre-closure charges. Thus, consider going for a fixed-rate loan when the interest rate is expected to rise in the near future and when your loan requirement is for the short to medium term.

Pre-EMI option

When you buy an under-construction property, the bank disburses the money stage-wise, which are also called construction-linked payments. Under a pre-EMI loan repayment option, the borrower pays only the simple interest accrued on the amount disbursed by the bank. The principal part is not repaid during the pre-EMI period. This option suits first-time homebuyers who stay in a rented home as they need to manage the loan EMIs along with the rental payments.

Full EMI option

If you have bought an under-construction property, you also get the option to repay the full EMI, which is also the normal EMI that you have to pay under a home loan. The EMI starts when the construction of the property is completed. Some lenders allow full EMI repayments before the construction of the property is completed which allows the borrowers to save on the overall interest outgo. So, if you want to clear your home loan quickly, you may choose the full EMI option with repayments starting at the earliest.

 Step-up EMI option

Many young borrowers want to buy a home at an early stage of their careers. However, they don’t want to repay big EMIs immediately but are confident they can easily afford higher EMIs as their incomes increase with time. For them, some banks offer home loans with increasing or step-up EMI facility in which the EMI size remains low initially but increases gradually after the completion of a defined period.

Also, if you are falling short of eligibility criteria for availing a big loan, a step-up EMI loan can improve your chances of getting your desired loan approved. This option is suitable for people who are confident their income will grow at a higher pace than the increase in their EMI level. The EMIs to such loans usually start from the first day of the loan.

Home loan with overdraft facility

Many borrowers, like self-employed professionals and businesspeople, have irregular incomes but they have access to big funds every now and then. There is a product called a home loan with overdraft (OD) facility that can be extremely useful for such borrowers. In this type of loan, a borrower gets the flexibility to deposit and withdraw money from the loan account.

For example, let’s assume Mr. Vijay, a businessman, has taken a home loan with OD facility of Rs. 20 lakh for 20 years. During the loan period, he receives Rs. 10 lakh from his business for a five-month period which he deposits in his home loan account to save interest on his loan to that extent. After 5 months, he withdraws the Rs. 10 lakh from the loan account and the interest will be revised again as per the loan balance.

As such, if you are looking to park your intermittent income to save interest, a home loan with an OD facility is highly suitable for you. However, do note that the interest on home loan OD is usually higher than regular home loan products, so closely evaluate your net benefit before making the decision.

In conclusion, make it a point to do ample research about different types of loan products and compare the offers by different lenders to find the best deal. And if you’re going for a floating rate home loan that’s linked to an external benchmark, try to use windfalls to prepay the loan as much as possible when the rates are low, and take steps to improve your credit score as the lowest rates are usually reserved for borrowers having an 800+credit score.

The writer is CEO,, India’s leading online marketplace for loans and credit cards.