With how much it costs to purchase a house these days, it is not easy for most people to purchase a house outright. Many of us have to take a home loan if we want to purchase our dream house. On our website, we have discussed interesting home loan products. One of those products is a step-up home loan, where you pay lower EMIs during the earlier part of the loan tenure and higher EMI during the latter part of the tenure. The prime benefit of such step-up home loan is higher home loan eligibility. SBI FlexiPay Home Loan scheme is a popular home loan product in this Step-up loan category. ICICI Bank Step-up home loan is another example. In these posts, I have discussed how these products work and how loan repayment schedule results in a higher loan eligibility.
Can we have an inverted structure? A repayment structure where EMIs are higher at the start and lower after a certain interval. Your first question will be, Why you will ever need such a structure? Let’s discuss a few cases.
- You want to take 20 year joint loan with your father. However, your father retires in 10 years. We will see why you would want a 20 year loan in such a case.
- You want to take a 20 year loan with a co-applicant (say, your spouse) where your co-applicant plans to stop working after 8 years. Clearly, you would want a structure where you can pay more while your co-applicant is still working.
- Nobody knows more about you than you do. You plan to take break from work after a few years. While you are still working, you would want to pay more (or perhaps even the entire amount).
I am merely thinking aloud. There may be more scenarios. By the way, in some cases, especially the 3rd case, the EMIs can be brought under control be making a large prepayment.
Let’s say a such a loan repayment structure exists. Let’s call such a loan Step-down Home Loan. By the way, this is the nomenclature that I have thought of. The names of loan products can vary. I came across this concept through a media release when Piramal Capital Housing Finance (PCHF) launched a new home loan product (AdvantAGE Loan). To me, this is first-of-kind product in India (at least I am not aware of such a product). However, don’t be surprised if banks and other housing finance companies decide to launch similar products in the future.
Piramal Housing Advantage Loan is for parent-child joint loans. Under this loan product, the parent and the child pay a higher EMI in the initial years. The EMI goes down post retirement of the parent. With such a structure, the parent’s income can be considered till retirement. Under a regular home loan product, the tenure of the joint loan would have been capped by years-to- retirement of the parent. With the Step Down loan, such limitation is not there and this results in a higher loan eligibility. We will see how. The PCHF website does not have any details about the product on its website except for this video.
In this post, the intent is anyways not to examine a particular loan product but to see how such step down loan can be helpful to you.
How Will Step-down Loans Work?
Every credit institution may have a different way of working out the loan eligibility for such step down loan products. The method will also depend on the product features. However, we can certainly look at how such step-down loan products can actually increase your loan eligibility.
Let’s assume you have a monthly income of Rs 1 lac. At FOIR (fixed income to obligations ratio of 50%, the bank will not give you a loan whose EMI will exceed Rs 50,000. Let’s assume the rate of interest is 9% and the loan tenure is 20 years. To calculate your loan eligibility, we can simply use Excel function PV (rate, no. of months, EMI,0,0) or PV(9%/12, 240,50,000,0,0) = Rs 55.57 lacs.
Another way to work out the loan eligibility: You will pay Rs 50,000 per month for the next 20 years. If you discount the EMI payments by the rate of interest (9% per annum) to the present, you will arrive at the same number.
- 50,000/(1+9%/12)^1 = Rs 49,628 for the first month
- 50,000/(1+9%/12)^2 = Rs 49,258 for the second month
- 50,000/(1+9%/12)^3 = Rs 48,892 for the third month
- And so on…
If you don’t trust me, here’s the Excel calculation excerpt below. You can check that the sum of the discounted EMI values actually adds up to the loan amount.
| Month | Principal Outstanding at the beginning of the month | EMI | Interest for the month | Principal repaid during the month | Principal Outstanding at the end of the month | Value of EMI discounted at 9% |
| 1 | ₹55,57,248 | ₹50,000 | 41,679 | ₹8,321 | ₹55,48,927 | 49,628 |
| 2 | ₹55,48,927 | ₹50,000 | 41,617 | ₹8,383 | ₹55,40,544 | 49,258 |
| 3 | ₹55,40,544 | ₹50,000 | 41,554 | ₹8,446 | ₹55,32,098 | 48,892 |
| 4 | ₹55,32,098 | ₹50,000 | 41,491 | ₹8,509 | ₹55,23,589 | 48,528 |
| 5 | ₹55,23,589 | ₹50,000 | 41,427 | ₹8,573 | ₹55,15,016 | 48,166 |
| 6 | ₹55,15,016 | ₹50,000 | 41,363 | ₹8,637 | ₹55,06,378 | 47,808 |
| 7 | ₹55,06,378 | ₹50,000 | 41,298 | ₹8,702 | ₹54,97,676 | 47,452 |
| 8 | ₹54,97,676 | ₹50,000 | 41,233 | ₹8,767 | ₹54,88,909 | 47,099 |
| 9 | ₹54,88,909 | ₹50,000 | 41,167 | ₹8,833 | ₹54,80,076 | 46,748 |
| 10 | ₹54,80,076 | ₹50,000 | 41,101 | ₹8,899 | ₹54,71,176 | 46,400 |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| 230 | ₹5,26,034 | ₹50,000 | 3,945 | ₹46,055 | ₹4,79,979 | 8,966 |
| 231 | ₹4,79,979 | ₹50,000 | 3,600 | ₹46,400 | ₹4,33,579 | 8,899 |
| 232 | ₹4,33,579 | ₹50,000 | 3,252 | ₹46,748 | ₹3,86,831 | 8,833 |
| 233 | ₹3,86,831 | ₹50,000 | 2,901 | ₹47,099 | ₹3,39,732 | 8,767 |
| 234 | ₹3,39,732 | ₹50,000 | 2,548 | ₹47,452 | ₹2,92,280 | 8,702 |
| 235 | ₹2,92,280 | ₹50,000 | 2,192 | ₹47,808 | ₹2,44,472 | 8,637 |
| 236 | ₹2,44,472 | ₹50,000 | 1,834 | ₹48,166 | ₹1,96,306 | 8,573 |
| 237 | ₹1,96,306 | ₹50,000 | 1,472 | ₹48,528 | ₹1,47,778 | 8,509 |
| 238 | ₹1,47,778 | ₹50,000 | 1,108 | ₹48,892 | ₹98,886 | 8,446 |
| 239 | ₹98,886 | ₹50,000 | 742 | ₹49,258 | ₹49,628 | 8,383 |
| 240 | ₹49,628 | ₹50,000 | 372 | ₹49,628 | 0 | 8,321 |
| Sum | 55,57,248 |
Now, under a Step-down loan, you (and your co-applicant) can make higher EMI payments during the initial years and a lower EMI pay-out towards the end. Let’s say you can pay Rs 50,000 per month towards EMI and your father can also make EMI payments of Rs 50,000 per month till his retirement in 10 years. In such a case, you can pay Rs 1 lac for the first 10 years (through combined incomes) and Rs 50,000 for the last 10 years. Using the same method of discounting EMI payments at the loan rate of interest, we arrive at a loan eligibility of Rs 95.04 lacs. Now, this is markedly higher than Rs 55.57 lacs.
If you still don’t trust me, let’s look at the following excerpt and check that the above EMI schedule is able to repay loan of Rs 95.04 lacs over 20 years (at 9% per annum).
| Month | Principal Outstanding at the beginning of the month | EMI | Interest for the month | Principal repaid during the month | Principal Outstanding at the end of the month | Value of EMI discounted at 9% |
| 1 | ₹95,04,332 | ₹1,00,000 | 71,282 | ₹28,718 | ₹94,75,615 | 99,256 |
| 2 | ₹94,75,615 | ₹1,00,000 | 71,067 | ₹28,933 | ₹94,46,682 | 98,517 |
| 3 | ₹94,46,682 | ₹1,00,000 | 70,850 | ₹29,150 | ₹94,17,532 | 97,783 |
| 4 | ₹94,17,532 | ₹1,00,000 | 70,631 | ₹29,369 | ₹93,88,164 | 97,055 |
| 5 | ₹93,88,164 | ₹1,00,000 | 70,411 | ₹29,589 | ₹93,58,575 | 96,333 |
| 6 | ₹93,58,575 | ₹1,00,000 | 70,189 | ₹29,811 | ₹93,28,764 | 95,616 |
| 7 | ₹93,28,764 | ₹1,00,000 | 69,966 | ₹30,034 | ₹92,98,730 | 94,904 |
| 8 | ₹92,98,730 | ₹1,00,000 | 69,740 | ₹30,260 | ₹92,68,470 | 94,198 |
| 9 | ₹92,68,470 | ₹1,00,000 | 69,514 | ₹30,486 | ₹92,37,984 | 93,496 |
| 10 | ₹92,37,984 | ₹1,00,000 | 69,285 | ₹30,715 | ₹92,07,269 | 92,800 |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| 111 | ₹46,22,865 | ₹1,00,000 | 34,671 | ₹65,329 | ₹45,57,536 | 43,631 |
| 112 | ₹45,57,536 | ₹1,00,000 | 34,182 | ₹65,818 | ₹44,91,718 | 43,307 |
| 113 | ₹44,91,718 | ₹1,00,000 | 33,688 | ₹66,312 | ₹44,25,406 | 42,984 |
| 114 | ₹44,25,406 | ₹1,00,000 | 33,191 | ₹66,809 | ₹43,58,596 | 42,664 |
| 115 | ₹43,58,596 | ₹1,00,000 | 32,689 | ₹67,311 | ₹42,91,286 | 42,347 |
| 116 | ₹42,91,286 | ₹1,00,000 | 32,185 | ₹67,815 | ₹42,23,470 | 42,031 |
| 117 | ₹42,23,470 | ₹1,00,000 | 31,676 | ₹68,324 | ₹41,55,147 | 41,718 |
| 118 | ₹41,55,147 | ₹1,00,000 | 31,164 | ₹68,836 | ₹40,86,310 | 41,408 |
| 119 | ₹40,86,310 | ₹1,00,000 | 30,647 | ₹69,353 | ₹40,16,957 | 41,100 |
| 120 | ₹40,16,957 | ₹1,00,000 | 30,127 | ₹69,873 | ₹39,47,085 | 40,794 |
| 121 | ₹39,47,085 | ₹50,000 | 29,603 | ₹20,397 | ₹39,26,688 | 20,245 |
| 122 | ₹39,26,688 | ₹50,000 | 29,450 | ₹20,550 | ₹39,06,138 | 20,094 |
| 123 | ₹39,06,138 | ₹50,000 | 29,296 | ₹20,704 | ₹38,85,434 | 19,945 |
| 124 | ₹38,85,434 | ₹50,000 | 29,141 | ₹20,859 | ₹38,64,575 | 19,796 |
| 125 | ₹38,64,575 | ₹50,000 | 28,984 | ₹21,016 | ₹38,43,559 | 19,649 |
| 126 | ₹38,43,559 | ₹50,000 | 28,827 | ₹21,173 | ₹38,22,386 | 19,503 |
| 127 | ₹38,22,386 | ₹50,000 | 28,668 | ₹21,332 | ₹38,01,054 | 19,357 |
| 128 | ₹38,01,054 | ₹50,000 | 28,508 | ₹21,492 | ₹37,79,562 | 19,213 |
| 129 | ₹37,79,562 | ₹50,000 | 28,347 | ₹21,653 | ₹37,57,908 | 19,070 |
| 130 | ₹37,57,908 | ₹50,000 | 28,184 | ₹21,816 | ₹37,36,093 | 18,928 |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| … | … | … | … | … | … | … |
| 231 | ₹4,79,979 | ₹50,000 | 3,600 | ₹46,400 | ₹4,33,579 | 8,899 |
| 232 | ₹4,33,579 | ₹50,000 | 3,252 | ₹46,748 | ₹3,86,831 | 8,833 |
| 233 | ₹3,86,831 | ₹50,000 | 2,901 | ₹47,099 | ₹3,39,732 | 8,767 |
| 234 | ₹3,39,732 | ₹50,000 | 2,548 | ₹47,452 | ₹2,92,280 | 8,702 |
| 235 | ₹2,92,280 | ₹50,000 | 2,192 | ₹47,808 | ₹2,44,472 | 8,637 |
| 236 | ₹2,44,472 | ₹50,000 | 1,834 | ₹48,166 | ₹1,96,306 | 8,573 |
| 237 | ₹1,96,306 | ₹50,000 | 1,472 | ₹48,528 | ₹1,47,778 | 8,509 |
| 238 | ₹1,47,778 | ₹50,000 | 1,108 | ₹48,892 | ₹98,886 | 8,446 |
| 239 | ₹98,886 | ₹50,000 | 742 | ₹49,258 | ₹49,628 | 8,383 |
| 240 | ₹49,628 | ₹50,000 | 372 | ₹49,628 | (0) | 8,321 |
| Sum | 95,04,332 |
Let’s do a small comparison of three different cases.
#1 Regular Home Loan 1 (Single):
- Your EMI potential: Rs 50,000
- Interest: 9%
- Tenure: 20 years
- Loan Eligibility: Rs 55.57 lacs
#2 Regular Home Loan 2 (Joint with father):
- Your EMI potential: Rs 50,000, Your father’s EMI potential: Rs 50,000
- Interest: 9%
- Tenure: 10 years (since your father retires in 10 years)
- Loan Eligibility: Rs 78.94 lacs
#3 Step Down Home Loan (Joint with father)
- Your EMI potential: Rs 50,000, Your father’s EMI potential: Rs 50,000
- Interest: 9%
- Tenure: 20 years (Your father will contribute to EMI payments for the 10 years till retirement. EMI: Rs 1 lac for the first 10 years, Rs 50,000 for the next 10 years)
- Loan Eligibility: Rs 95.04 lacs
You can compare and see that a step down home loan has resulted in much higher loan eligibility.
Should You Go for It?
I have no adverse comments against such a product structure per se. I might find flaws when we review a specific step down loan product. Clearly, many families can find value in such a product structure. At the same time, there is a minor caveat, especially if you are a parent in the step-down loan structure. A good chunk of your monthly savings till your retirement will go towards EMI. This will severely compromise your investments for your retirement. You may end being heavily dependent on your kids during retirement. Not sure if you would want that. Moreover, since the repayment structure allows to borrow more, you may actually end up over-borrowing. A step-down loan gives you a great option. Make sure you don’t mess up, especially you are the parent (in this structure) and close to retirement. What do you think?
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