Over the years, home loans have evolved significantly. Today, many lenders offer customised home loan solutions and special services to suit the specific needs of the borrowers. One such service is the ‘Interest only home loan.’ Recently, one of the leading financial institutions in India launched an interest-only home loan facility for new and existing home loan customers.

As the name suggests, an interest-only home is a unique facility that allows you to pay only the interest for a specific period, as mentioned in the loan documents. This period is called the interest-only period. This facility has been welcomed by several new home loan borrowers as it allows them to reduce their repayment burden and increase their loan eligibility.

The interest-only repayment period ranges from 12-36 months. You can choose the duration to suit your specific needs and financial standing. Once this period is over, you must start paying the regular EMI amount that includes both principal and the interest amount.

Who can benefit from an interest-only home loan?

The interest-only home loan facility is beneficial for all home loan borrowers who wish to buy a property at lower prices but are short of cash to pay the full EMI amount during the initial few years. A lower monthly EMI means you can enjoy valuable savings. Also, when you have more cash in hand, you can use the amount for investments and generate returns or for other purposes like paying stamp duty or carrying out home renovation.

If you are expecting a rise in your salary or if you are due to receive a lump sum amount in the form of an annual bonus or dividends from your investments, you can take advantage of the attractive deal on the property purchase.

Should you opt for an interest-only home loan?

In terms of the interest-only EMI payment concept, there is nothing new about this loan. You can get similar flexibility in the form of overdraft home loans where you only have to repay the interest initially and later repay the principal amount as per your convenience.

When you compare overdraft home loans with interest-only loans, the latter allows the interest payment only for a limited period. Additionally, unlike an overdraft loan, you are not allowed to withdraw funds as per your requirement.

However, you must know that overdraft loans have higher interest rates compared to a regular home loan. Although the lenders offering interest-only home loans suggest that the interest rate for such loans is competitive and in line with the existing market rates, the customers or potential borrowers do not have any clarity on the comparative interest rates. Hence, if you want to choose an interest-only home loan, you must be wary of the difference in the home loan interest rate.  

Additionally, the interest-free period you get on an interest-only home loan is only an extension of the home loan duration. So, if you want to repay only the interest part of your home loan for three years and opt for a loan tenure of 15 years, then your actual repayment period will be 18 years. And, longer home loan tenure means higher interest payment in the long run.

Final Word

Now that you know what an interest-only home loan is and its financial implications, assess your financial conditions carefully and make an informed borrowing decision.