Home Loan: What is Step-up EMI? Is it good or risky for the salaried class?

Step-up EMI works on the basis of a borrower’s expected rise in income over the years. Borrowers have to pay lower EMIs in the initial years of their loan tenure. However, it could be risky as the rise in income may not always keep pace with the increase in inflation and interest rates.

Step-up EMIs are an attractive but risky option.

Equated Monthly Instalments (EMIs) are used as a repayment option for a variety of loans. Step-up EMIs are another method borrowers can opt for when choosing their loan repayment criteria. The scheme differs slightly from the normal EMI payments. Under step-up EMIs, borrowers have to pay lower EMIs in the initial years of their loan tenure. Later the EMI amount increases gradually with every passing year.

Here’s a detailed look at the concept of step-up EMIs and if it can be a feasible idea to opt for.

How do step-up EMIs work?

The repayment option works on the basis of a borrower’s expected rise in income over the years. The lender keeps the EMI lower for the first few years and factors in an individual’s future earnings to increase the installments with every passing year.

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What are the advantages of a step-up EMI?

Affordability: The scheme makes owning a home more affordable for young professionals. People who are in the initial stages of their career and have a modest income, this could be a better option. The step-up EMI plan allows borrowers to manage their loan repayment more in line with their career growth and finances. The repayment option can make it easier for a borrower to possess a home despite having a lower starting salary.

Tax benefits: Borrowers can claim deductions against home loan repayments under Section 24 of the Income Tax Act, 1961. Home buyers can use this deduction in conjunction with step-up EMIs to maximise their savings.

Enhances loan eligibility: Since lenders consider a person’s expected growth in income, more banks and NBFCs may offer home loans with favourable terms and conditions depending on the career progress of the borrower. This option can help borrowers avail more choices.

What are the risks associated with step-up EMI?

Step-up EMIs also come with certain risks. The rise in income may not always keep pace with the increase in inflation and interest rates. This can make it tough for a borrower to keep up with payments, particularly if they have opted for floating interest rates. The plan could also turn out to be more expensive in the long run than regular EMI since the interest is lower in the early years and increases later.

Is step-up EMI plan a good or risky option for the salaried class?

Step-up EMIs are an attractive but risky option. The repayment scheme makes it easier for anyone to own their own home, but the financial burden may turn out to be higher towards the later part of the tenure. If one is opting for a step-up EMI, they need to seek professional guidance and understand if it is the best option for them. Apart from this, considering the layoffs and job losses in the private sector Step-up EMIs could be a risky option for salaried class.

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