Home Loan Repayment

​What is Home Loan Repayment?

Home Loan repayment refers to the process of repaying a borrowed loan amount along with the applicable interest over an agreed tenure. Typically, borrowers repay their Home Loan through Equated Monthly Instalments (EMIs), which are scheduled over the loan tenure as per the lender's amortisation schedule.

EMI: How Your Monthly Payment Works

Every Home Loan EMI consists of two components — principal and interest:

1. Principal Component

   This is the portion of the EMI that goes towards repaying the original loan amount borrowed from the lender. In the initial years of the loan, a smaller share of the EMI is allocated towards the principal. As the loan progresses and the outstanding balance reduces, the principal component gradually increases.

2. Interest Component

   This is the cost of borrowing the loan amount and is calculated on the outstanding principal balance. During the early stages of the loan tenure, a larger portion of the EMI is used to pay interest. As the outstanding balance decreases over time, the interest component gradually reduces.

This gradual shift in the composition of an EMI is known as amortisation. In the initial years of a Home Loan, a significant portion of each EMI is directed towards interest payments. Over time, as the outstanding principal decreases, a larger share of the EMI is applied towards repaying the principal. By the end of the loan tenure, most of the EMI contributes to reducing the principal balance, with only a small portion allocated towards interest. You can use our Home Loan EMI Calculator to estimate your EMIs and view your amortisation schedule.

Types of Repayment Options

While the repayment schedule for a Home Loan is typically determined at the time of loan sanction, borrowers may have access to different repayment options depending on their financial circumstances and the lender's policies. Choosing a suitable repayment structure can help align loan obligations with income patterns and financial goals.

Step-Up Repayment

Under a step-up repayment plan, the EMI starts at a lower amount and gradually increases over the loan tenure. This option may suit individuals at the beginning of their careers who expect their income to rise over time and prefer lower initial repayment obligations.

Step-Down Repayment

A step-down repayment plan works in the opposite manner, with higher EMIs at the beginning of the tenure that gradually decrease over time. This option may be suitable for borrowers with a stable income who anticipate lower earnings in the future, such as those approaching retirement.

EMI Holiday

Some lenders may offer an EMI holiday immediately after loan disbursal. During this period, EMI payments are deferred for a specified duration, providing borrowers with additional flexibility in managing their finances during the initial phase of the loan.

Lump-Sum Repayment

Borrowers who have access to substantial funds may choose to repay a significant portion of the outstanding loan amount in one payment. In cases where the loan is disbursed in stages, borrowers may initially pay only the applicable interest on the amount disbursed. Regular EMIs generally commence after the complete loan amount has been disbursed.

Balloon Repayment

A balloon repayment structure involves making smaller payments during the loan tenure, followed by a larger payment towards the end of the repayment period. This option may be considered by borrowers who expect a substantial inflow of funds in the future.

Prepayment

Prepayment allows borrowers to repay a part of the outstanding principal or the entire loan amount before the scheduled tenure ends. This can help reduce the overall interest outgo and, depending on the lender's terms, may also shorten the loan tenure. Individual borrowers with floating interest rate Home Loans face no additional charges if they wish to prepay or foreclose their loan. However, for fixed rate Home Loans, prepayment charges apply if payment is not made from 'Own Sources'.

Different Home Loan Repayment Options Explained

While financial institutions and banks determine the housing loan repayment schedule in most cases, the borrower can make certain changes as per convenience and financial needs. For example – one may either choose to pay the EMI in small installments throughout the length of the tenure or pay a higher instalment to pay off the entire amount way before the expiry of the loan tenure. Borrowers can pick from the following Home Loan repayment methods.

Step-Up Repayment

For this type of repayment option, the EMI amount increases as the tenure extends. In other words, the borrower pays a lesser EMI during the initial years of loan repayment and a larger EMI as the tenure progresses. This type of repayment option is best suited for freshers or newbies if they do not have enough funds to pay off the EMIs during the start of their careers.

Step-Down Repayment

Contradictory to the previous one, the Step-down repayment option involves an eventual decrease in the housing loan EMI with the extension of the tenure. This is suitable for borrowers nearing retirement age since paying off a higher EMI can be easier when one has a steady source of income.

EMI Holiday

Some lenders offer an exclusive EMI holiday at the beginning of the repayment schedule to delay the EMI deduction from the bank account by a couple of months following the loan disbursal.

Lump-Sum Repayment

This is a great option for borrowers planning to settle the loan amount immediately. In the case of a housing loan, the total amount can be disbursed in instalments, in such cases, the borrower only pays the interest on the loan amount, also known as pre-EMIs, till the disbursal of the final instalment. The EMIs, which comprise both interest and the principal amount, are payable following the complete disbursal of the housing loan. The lump-sum payment can be done after the full disbursement of the loan amount.

Balloon Repayment

This option works along the same lines as the lump sum repayment, but the borrower has to make a larger payment as the last instalment. The tenure is usually taken for a shorter period.

Prepayment

Prepayment is a good option for those who have surplus funds in hand and are willing to repay the amount completely or partially.

Individual borrowers with floating interest rate Home Loans face no additional charges if they wish to prepay or foreclose their loan. However, for fixed rate Home Loans, prepayment charges apply if payment is not made from 'Own Sources'.

Note: 'Own Sources' refers to any source other than borrowing from a bank/NBFC/HFC and/or a financial institution.

Understanding Your Home Loan Repayment Schedule

Your Home Loan repayment schedule, also known as amortisation schedule, outlines how your EMIs are split between interest and principal over the loan tenure. In the initial years, a larger portion of your EMI goes towards interest payment, while the principal component gradually increases over time.

To easily view this breakdown, you can use our Home Loan EMI Calculator. It helps you estimate your monthly instalment and provides a detailed repayment schedule to give you a clear picture of how you will repay your loan month-wise.