Home loans in India are becoming increasingly varied, catering to a wide range of financial needs. Step-up loans have arisen with a particular structure that adjusts to borrowers' growing salaries. Understanding these contrasts is essential for making wise financial decisions.
Step-Up Loan
Step-up loans are loan repayment options in which borrowers begin with smaller monthly instalments that progressively grow during the loan period which differs from normal EMI payments. This method is especially useful for young professionals who expect significant income rises over time but begin with lower earnings.
How Step-Up Loans Work
Assuming that the borrower's income will increase over time, the lender first sets lower EMIs. The lender progressively increases the EMIs year after year as the borrower's salary rises.
There are many risks associated with Step-Up loans. The estimated growth in income may not necessarily correspond to the level of inflation and interest rate hikes. A loan may become more expensive in the long run than standard EMIs because interest rates are lower in the early years and grow later.
Benefits of Step-Up Home Loans:
Higher Approval Chance: Lenders analyze future income growth, which increases approval chances.
Increased Loan Amount: As your income increases, you'll be eligible for greater loans.
Early Access: Young professionals can obtain a house loan early in their career.
Tax Savings: Under Income Tax Act Section 24, borrowers might receive tax benefits.
How is it Different from Top-Up Loans?
Top-Up Loans: A top-up personal loan is an additional loan amount offered to existing personal loan borrowers by their lender, above their current loan amount. This option is available if the borrower has maintained a satisfactory repayment history and paid a specified number of instalments on time.
Key Differences
Purpose: While Top-Up Loans are designed to give borrowers who currently have personal loans more cash, Step-Up Loans are designed to finance a home based on predicted income growth.
Interest rates: Step-up house loans often have lower interest rates than top-up loans.
Eligibility: While Top-Up Loans require a solid payback history on previous loans Step-Up Loans consider future earning potential.
