Understanding Home Loan Variants: Essential Considerations for Borrowers
Alternative Repayment Structures for Home Loans: Understanding the Risks and Benefits
Home loans have evolved beyond the traditional equated monthly instalment (EMI) model. Banks and housing finance companies now offer various alternative repayment structures, including moratorium loans, no-EMI-till-possession schemes, and balloon payment loans. These options are designed to address specific borrower needs, but experts caution that postponing repayments can increase the total cost of borrowing over the life of the loan.
How Alternative Repayment Structures Work
Moratorium loans allow borrowers to postpone EMI payments for a specified period, but interest continues to accrue during the deferment period, adding to the outstanding loan amount. According to Adhil Shetty, CEO of BankBazaar.com, a moratorium loan allows deferment of full EMIs, though interest accrues continuously, increasing total borrowing cost and extending tenure or raising future EMIs.
No-EMI-till-possession schemes are commonly offered for under-construction properties. Borrowers do not start regular repayments until they receive possession of the property, though the underlying interest cost is typically borne indirectly. Aadhar Housing Finance's MD & CEO, Rishi Anand, notes that in no-EMI-till-possession schemes, the builder services EMI or interest until possession, improving short-term affordability, but the loan remains the borrower's liability, and property pricing typically includes the builder's EMI costs indirectly.
Balloon payment loans involve smaller repayments in the initial years followed by a substantial lump-sum payment at a later stage. According to Vijay Raundal, Director, Teerth Realties, balloon payment loans may reduce immediate repayment pressure but can create significant repayment risk later.
Who Should Consider Alternative Repayment Structures?
Experts say these products are suitable only in specific situations. No-EMI-till-possession schemes appeal to first-time buyers and salaried professionals seeking lower upfront stress, but only if the developer has a strong track record and financial stability. According to Sarika Shetty, Co-founder and CEO of RentenPe, such alternatives may suit young professionals expecting income growth, buyers juggling rent and home purchase costs, or individuals anticipating future liquidity events such as bonuses, ESOP exits, or inheritance.
Read also: Missing a Single EMI Payment Can Adversely Impact Credit Profile
Risks Associated with Alternative Repayment Structures
The biggest concern is that lower payments today may create a false sense of affordability. Aadhar Housing Finance's MD & CEO, Rishi Anand, notes that many borrowers compare products only on the basis of what they have to pay today, but what ultimately matters is the total amount that leaves your pocket over the life of the loan. Other risks associated with these structures include project delays increasing costs in no-EMI schemes and refinancing and liquidity risks if the expected future cash inflow fails to materialise.
| Loan Type | Interest Accrual | Risk Profile |
|---|---|---|
| Moratorium Loan | Interest accrues continuously | Increases total borrowing cost and extends tenure or raises future EMIs |
| No-EMI-till-Possession Scheme | Interest cost borne indirectly | Project delays can increase costs |
| Balloon Payment Loan | Smaller repayments followed by lump-sum payment | Creates significant repayment risk later |
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