The jargon of the various loan terms used by home loan sellers sometimes becomes confusing. Here is a list of 15 questions you may encounter during the home loan process that you must know before applying for a home loan. These terms are placed in a simple, easy-to-understand language from a layman’s perspective.
What Is a Pre-Approval of a Home Loan?
In case the client wants to approve the loan approval without first finalizing the property; he can do this by submitting the application in a similar way to a regular home loan application. However, some companies require a statement from the client that he is applying for prior approval and has not identified the property. Wherever such a declaration is not there; it can always be written in bold that this application is for loan sanction without finalizing the property.
What Is an EMI?
EMI is the amount paid to the lending institution each month until the loan is repaid in full. It consists of overdue interest as well as a portion that can be returned to equity, so EMI is principal plus interest. Interest is charged on the outstanding principal at the end of each month. There is a myth; many people tend to believe that banks charge high-interest rates at the beginning and low-interest rates at the end to charge more interest rates. The fact is that if you calculate the interest charged at a certain time, it would simply be the interest charged on the principal for that month. Because the principal over the first 6 to 7 years of a 20+ year’s loan is very high, the share of interest in EMI is also large.
What Is Pre-EMI?
In the case of undeveloped properties; where the possession of the property would be offered at a later date, in order to avoid the additional burden of the borrower, who is on rented accommodation and at the same time pays the rent. Banks or HFCs offer the option of deferring EMIs to the possession or for a period of time. The payment of interest for such a period is called interest before EMI.
What Is Daily Reducing, Monthly Reducing, and Annual Reducing?
- Annual Reduction
In this system, the principal for which you pay interest decreases at the end of the year. Thus, you continue to pay interest on a portion of the principal that you actually repaid to the lender through EMIs paid during the year. This means that the EMI for a monthly reduction system is effectively lower than the annual reduction system. EMI as a concept is based only on a monthly reduction.
- Monthly Reduction
In this system, the principal for which you pay interest decreases each month as you pay your EMI.
- Daily Reduction
In this system, the principal for which you pay interest is reduced from the day you pay your EMI. The EMI in the daily reduction system is lower than the monthly reduction system.
What Is a Fixed Rate of Interest?
A fixed interest rate means that the interest rate remains unchanged for the specified duration of the loan. This means that you do not benefit if interest rates fall in the market. Similarly, you do not lose if you raise interest rates. Under fixed mortgage rates, banks or HFCs also reserve the right to raise interest rates after the prescribed interval. This provision is mentioned in the loan agreement. This is known as the fine print reset clause.
What Is a Floating Rate?
This is an interest rate that fluctuates according to the market loan rate. This is sometimes called an adjustable interest rate. The adjustable interest rate is indicated at the base rate by the banks and at the PLR by the HFCs. The base rate of the benchmark or PLR is changed by the interest rate change by the RBI.
What Is the Reset Clause?
The reset clause in the loan agreement is a clause that defines the time to reset the interest rate and other terms and conditions. This reset clause is usually set in fixed-rate loans.
What Is Base Rate?
Banks in India link all loans to the key interest rate. The base rate of a bank is the reference rate and all lending is tied to this rate. The basic rate of a bank is determined according to the cost of funds plus the interest margin. The cost of assets is assumed to be lower for a bank that has a high current account balance and savings account (CASA balances). Banks charge a base rate margin for various products. For example. SBI home loans up to RK 75 are available at 10.15%, and the SBI base rate is currently 10.00%. This means that the SBI charges a margin of 0.15% for a home loan at the base rate. This margin will remain constant throughout the term of the loan.
What Is Prime Lending Rate?
Financial companies for housing such as LICHFL, HDFC, and PNBHFL, etc. Borrow at the primary lending rate. Each HFC would have a different name for its PLR, but it means the same thing. For example. LICHFL calls its PLR LHPLR, and HDFC calls RPLR. PLR is generally a large number and these companies give a discount to PLR to achieve an effective interest rate to be charged to the client. This discount is the single most important factor and the reason why the loan to an existing customer is at a higher rate, and the loan to a new customer would be at a lower rate. Because these HFCs have embraced this practice, they do not reduce PLR as quickly and give higher discounts to new customers.
What Is a Better PLR or Base Rate?
The base rate is better for 2 reasons –
- Banks have access to low-cost CASA balances and
- The margin rate charged is generally small and has less flexibility for the bank to change too much often.
What Is A Construction Linked Plan?
Under a payment-related construction plan, the property buyer is required to pay in installments as the construction phase progresses. The loan thus taken is also repaid in stages and does not put EMI pressure on the borrower immediately. Therefore, people living in rented accommodation can opt for this type of plan.
What Is the Approved Project Funding?
For the convenience of individual borrowers and to avoid inconvenience to individual buyers of real estate, banks do not require a complete package of property documents from a particular project from individual borrowers; instead, the construction worker is required to provide such documents to the bank. The bank approves the financing project after taking proper care. This is called approved project financing or is generally called AFP. The builder generally only accesses 4 to 5 banks to get an approved project. However, this does not mean that other banks cannot finance the project. The only difference is that the individual borrower will have to run around and submit the documents to the banks. It would be ideal for the borrower to approach a bank that has already approved the financing project to avoid running around.
What Is A Prorated Home Loan?
For young individuals in the early stages of their careers, it is difficult to pay a large lump sum as part of their contribution when booking an undeveloped property. Therefore, they can opt for financing their contribution in the same part as the bank contribution as the construction phase progresses. However, some banks require a minimum of 15% of the price of the apartment is overpaid by the borrower in advance. After that, the bank starts making payments. However, at any time, the HFC or Bank share may not exceed the borrower’s share.
What Is the Security Required for Home Loans?
In most cases, the property to be purchased is accepted as collateral and is mortgaged to the credit institution until the entire loan is repaid. In case there is a problem with the creditworthiness of the client or the property being financed is not fully technically compliant, the loan institution may request additional collateral. Some institutions may require additional security, such as life insurance policies, FD certificates, and sharing or savings certificates.
What Is the Second Charge?
In some cases, employers, such as banks or government. Institutions offer loans to their employees at very subsidized rates. However, such loans are not enough; because the value of the property is much higher. Therefore, the borrower also seeks a loan from another bank or HFC. Property that is already mortgaged to an institution, if accepted by the second lender as collateral, is called a second charge. Banks or HFCs accept the second collection from the central government sector. Departments and some PSUs as well. It should be clarified in advance before applying for a second home loan on the same property.