How to Use a Step-Up Loan to Get Higher Eligibility for a Home Loan

7 minutes

Finding a home loan that suits your financial situation can be challenging, especially when initial payments are high. This often leaves potential homeowners feeling stuck and unable to afford their dream home. A step up loan addresses this issue by allowing you to start with lower EMIs that gradually increase, making it easier to manage your finances.

This option not only helps you qualify for a larger loan but also aligns with your expected income growth. 

Explore how a step-up home loan can enhance your eligibility and get you closer to owning your home today.

What Is a Step-up Home Loan? 

A step-up home loan is a unique financial product designed to offer flexibility in your repayment schedule. It allows you to begin with lower EMIs and gradually increase them over time, making it an excellent option for young professionals or growing families expecting a rise in income.

This loan structure is particularly helpful in boosting eligibility for higher loan amounts, as it accounts for future financial growth.

Types of Step-Up Home Loans

Step-up home loans come in two main types, each offering a different repayment structure:

• Interest Servicing Construct: For the first 1-2 years, you pay only the interest as EMIs, with no payments toward the principal. This reduces your repayment burden initially, allowing you to manage other financial commitments. After this period, regular EMIs (including principal and interest) begin.

• Term Loan Construct: After completing the interest-only period, you switch to paying regular EMIs, covering both the principal and interest for the rest of the loan tenure.

Step-up Home Loans vs. Regular Home Loans

When considering a home loan, understanding the differences between step-up home loans and regular home loans can help you make an informed decision tailored to your financial needs.

Criteria	Step-Up Home Loans	Regular Home Loans
EMI Structure	Lower initial EMIs that increase over time.	Fixed EMIs throughout the loan tenure.
Repayment Flexibility	Interest-only payments in the initial phase.	Principal and interest payments from the start.
Eligibility Criteria	Boosts eligibility by considering future income potential.	Based on current income levels only.
Financial Planning	Ideal for borrowers anticipating income growth.	Better for those preferring stability in payments.
Long-Term Costs	Potentially higher total cost due to increasing EMIs.	Predictable costs but no initial flexibility.

How Does a Step-up Home Loan Work?

A step-up home loan offers a structured repayment model that eases your financial burden in the early years and aligns your EMIs with your expected future income growth. Let’s break it down with an example to understand how this works.

Loan Details:

• Loan Amount: ₹50 lakhs
• Tenure: 20 years (2 years interest-only + 18 years regular EMI)
• Interest Rate: 8%

First 2 Years (Interest-Only Period)

You’ll only pay the interest component of the loan, which amounts to ₹33,333 per month. During this period, no principal repayment is required, helping reduce your financial outflow by 20.3% compared to a regular EMI.

Remaining 18 Years (Regular EMI Period)

After the initial 2 years, the EMI increases to ₹43,748, covering both the principal and interest. This higher EMI reflects the repayment of the principal, with a 4.6% increase compared to a standard loan EMI.

How Does a Step-up Loan Increase Your Eligibility for a Home Loan? 

A step-up loan directly boosts your home loan eligibility by structuring repayments to align with your expected income growth. It enhances your eligibility in the following ways:

• Lower Initial EMI Payments: In the initial years, you pay only the interest portion of the loan, which lowers your monthly EMI significantly. This reduced financial burden makes it easier for lenders to approve a higher loan amount, as your current income can comfortably cover the initial payments.

• Future Income Projections: Lenders consider your future income potential when offering a step-up loan. If you are early in your career with an anticipated salary increase, the bank takes this into account, allowing you to qualify for a larger loan than a traditional plan.

• Improved Debt-to-Income Ratio: Since your EMIs are lower at the start, your debt-to-income ratio remains favourable. A lower ratio improves your credit profile, making it easier to qualify for a higher loan amount without stretching your financial limits.

How to Apply for a Step-up Home Loan

Applying for a step-up home loan is a simple yet crucial step to secure higher eligibility and manage your EMIs effectively. Follow these steps to ensure a smooth application process:

1. Access the Online Application: Begin by visiting your lender’s website and selecting the ‘Apply Online’ option. This will open the application form for you to get started.

2. Enter Personal Details and Verify: Provide essential details like name, age, and income, and verify your profile with an OTP for security.

3. Use the Eligibility Calculator: Calculate your loan amount and tenor using the lender’s eligibility calculator. This tool will help you pick a suitable loan amount based on the step-up loan’s repayment structure.

4. Complete Financial and Employment Details: Input details such as employment history, financial standing, and property specifics to help the lender assess your loan eligibility.

5. Select the Step-Up EMI Option: During the application, opt for the Step-Up EMI feature, choosing either:

• Interest Servicing Construct: Pay only interest during the initial years.
• Term Loan Construct: Pay both principal and interest after the interest-only period ends.

6. Lender Follow-Up: After submission, a representative will contact you to guide you through the final steps and complete your application.

Advantages of a Step-up Home Loan

A step-up home loan offers several benefits that can enhance your financial flexibility and increase your loan eligibility. The key advantages are:

• Increased Loan Eligibility: With a step-up loan, you can qualify for a higher loan amount as the initial EMIs are lower, making it easier for lenders to approve larger sums. This is especially beneficial for young professionals expecting a rise in income over time.

• Lower EMIs Initially: During the initial years, you only pay the interest component, reducing your financial burden. This is particularly useful when you’re just starting out in your career and expect your income to increase in the future.

• Improved Cash Flow Management: The reduced EMI payments in the beginning free up cash for other financial commitments, such as savings or investments, while still enabling you to afford a home sooner.

• Tax Benefits: Even during the interest-only period, you can continue to enjoy tax deductions on the interest paid under Section 24(b) of the Income Tax Act, maximizing the tax efficiency of your loan.

• Flexible Repayment Structure: You have the option to choose between an interest-servicing construct or a term loan construct, allowing you to tailor the repayment schedule to your financial situation and future income growth.

Final Words

A step-up home loan offers a flexible approach to home financing, helping you manage your repayments while enhancing your eligibility. If you’re ready to explore this option, turn to Credit Dharma for simple home loans. Get exclusive low-interest rates from top banks, the highest funding, and dedicated home loan experts to guide you.

Frequently Asked Questions [FAQs]