For a step-up loan a bank considers potential earnings of the borrower to offer him a higher loan amount
Astep-up loan is given by the bank/financial institution to the borrower based on his future/ expected income. The lending institution takes a call on the professional growth of the individual. This will result in the borrower getting a larger loan amount that what he is currently eligible for. In effect, the borrower is leveraging the potential increase in salary to obtain a higher loan today. What distinguishes a step-up loan from a plain vanilla loan product is the fact that potential earnings are taken into consideration, which pushes up the cash inflow enabling the financial institution to offer the borrower a higher loan amount.
Market information suggests that the step-up loan would push up the loan amount eligibility by anywhere between 5 per cent and 30 per cent depending on the individual's profession i.e. government employee or an information technology employee etc.
Such loans are given different names given by different financial institutions e.g. SURF (Step up Repayment Facility) is by HDFC, Corp Flexi home loan is given by the Corporation Bank. Who gets the loan?
Strong contenders for this loan would typically be double income households, young working professionals who are just starting out in their careers. That's because the premise on which this product functions is that the borrower's cash inflow will increase on account of an increase in salary going forward. This loan is given on a case-tocase basis only. Besides, it is not offered by all financial institutions because of high risk to the lender.
Features of step-up-loans This product is structured in such a manner that the EMIs increase over the tenure of the loan (unequal EMIs). This means that the EMIs are low initially, and as the loan progresses , the EMI amount begins to increase. This is akin to balloon repayment. A large proportion of the EMI during the initial phase goes towards servicing the loan, and later as the EMI increases, the principal amount also starts getting covered.
The reason why it is structured in this manner is because as time progresses on account of an increase in cash inflow, (the basic premise on which this product functions) the borrower's capacity to pay higher EMIs increases. Thus this product is apt for early borrowers, who do not have high income initially and hence cannot afford high EMIs in the early years.
Step-ups can happen in different phases depending on the need of the borroweryearly, alternate years, five years or at some other time intervals. For e.g., for a 20year home loan, the step up could happen in year three, and year 10 which means for the first three years bulk of the EMI goes towards servicing the loan.
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