The Indian retail loan market has undergone many changes over the years. Increased competition in the lending segment has led banks and financial institutions to battle it out by coming up with innovative schemes to attract potential borrowers. Step up loans or step up repayment facility (SURF) is one such innovation for home loan products which are gaining popularity amongst borrowers.
A step up loan is one in which a bank or a financial institution lends taking into account the borrower's future income. The lender decides the loan amount for which an individual is eligible on the basis of the borrower's expected professional growth. In this way, a borrower qualifies for a larger loan amount even if his present salary is low.
Usually, step up loans can increase the loan amount by 5% to 30 % depending upon the employment status of the borrower, i.e. whether the borrower is a government employee, a C.A or a management graduate. In case of a government employee, the loan amount may be lower than say a management graduate as the future jump in salary is expected to be lower than that of a management professional working in financial sector. As a rule, lending institutions decide on the loan amount and Equal Monthly Installments (EMI) for step up loans, on a case to case basis as they need to be convinced about the borrower's professional growth. Apart from this, factors like an individual's background, his educational qualification and the like are used to arrive at the borrower's future salary package.
- Flexibility in loan repayment: These loans are structured in such a way that the EMIs increase as the loan progresses. It means that, during the initial years the EMI amounts are low and they go on increasing over the tenure of the loan. Initially, a considerable part of EMIs is used to pay off just the interest, but as the loan progresses, the principal amount also starts getting covered in the EMI amounts.
- Expensive alternative: As compared to other home loan schemes, step up loans are considered to be expensive because the repayment of the principal amount starts after a certain time period (or a phase). As during the initial years (or the first phase), the borrower repays just the interest, he ends up paying interest for the entire principal amount.
- Tax Deductions: Interest on home loans is deductable under Section 24 of the Income Tax Act up to Rs. 1, 50, 000. As the initial years are spent only in servicing the loan, the borrower can maximize tax benefits on this front and reduce the total cost of his borrowing.