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Home loans: Step up and step down

Here are two schemes you can choose from

Step-up plans: Suppose your present income qualifies you for a loan of Rs 15 lakhs with which you can buy a two-bed-room flat, but you want to buy a three-bedroom flat, for 20 lakhs. You then opt for a step-up plan. Because of your present income you may be constrained to buy a two-bed-room flat. But five years down the line, probably your income may regret not having brought a three bedroom flat. Remember, you don’t change houses every five years. Thus, the step-up loan plan takes care of the needs of younger buyers (say in their early thirties) who have a long working life ahead of them, and whose jobs hold great prospects. These loans allow you to borrow an amount that is about 20% higher than your present capability.

Step-down plans: Just as you have step-up plans where the EMI rises as the years go by, you also have step-down plans. These come handy for people in their forties or even early fifties (for whom the retirement age is say 65). Such people are usually at the peak of their earning capacity when they take would want to pay off the greater part of the loan upfront (during the early years) and would want lower EMIs close to their date of retirement (when they would rather channelise their earnings into saving plans; or they would want to be mentally free of the burden much before their date of retirement). Step-down plans serve another function. Normally banks prefer that the loan tenure should terminate prior to the date of retirement. But with step-down plans they allow the borrower to spread his age of retirement. Banks realise that the borrower’s income will shrink after retirement. So they structure the repayments in such a way that the EMIs are higher during the earlier part of the loan tenure and lower during the later part.

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