Monday, 16 November 2015

FAQ ON BANKING(HOME LOANS)


What are Annual / Monthly reducing Balance?
Reducing balance means the time at which interest is calculated and applied to a Loan account.  Repayment of home loan is by way of equated installments paid every month (EMI’s). But housing finance companies adopt different modes of adjusting these monthly repayments towards the Loan account and to bring down the Loan amount due. 

In annual reducing balance method, the monthly repayments received from the Borrower are kept in a suspense account and transferred to the Loan account only once in a year generally on 1st of April. To be more clear, if your Loan amount as on 1st April, 2008 is Rs.5,00,000/- and you  pay monthly installments of Rs.10,000/-, your entire payment of Rs.10,000 X 12 = 1,20,000/- will be adjusted towards Loan amount only on 01/04/2009 and interest from 01/04/2008 to 31/03.2009 will be calculated on Rs.5 lakhs. This works out very costly as you will be paying interest on Rs.5,00,000/- for the entire 12 months.


In case of monthly reducing balance method, the repayments are credited to your Loan account on a particular day in a month, though you would have paid the installment much earlier to that date.  If some particular housing finance company has fixed 15th of every month, for such adjustment, and if you pay on 5th of every month, your Loan amount gets reduced only on 15th of that month. Most of the housing finance companies have shifted from annual reducing balance method to monthly reducing balance method.  The most preferable mode of payment of EMI is daily reducing method, where under your Loan amount gets reduced on the very day of your repayment.

What is fixed and floating rate ?
These are two different modes of interest calculation. Floating rate is also called as Variable rate. In fixed rate, the rate of interest is fixed and will not change in the entire period of the Loan. Fixed rate will be higher than the floating rate, as it is not affected by market fluctuations. In floating rate or variable rate, the rate of interest changes depending upon market conditions. It may increase or decrease depending upon the change in the market conditions. The repayment period also varies, but equated monthly installments remain the same. Presently, floating rate is most favoured by lending institutions. If the repayment period is more than five years, it is advisable to prefer fixed rate.

What is flat rate of interest ?
In flat rate, the interest is charged on the full amount of Loan for the entire period, irrespective of your repayments. If you have availed Loan of rupees ten lakh repayable in ten years, interest will be charged on rupees ten lakh for all the ten years, ignoring your repayment.

What is fore closure fee ?
This is a fee charged by the bank / financial institutions if loan account is closed before the agreed period. If the bank and Borrower have agreed for a repayment period of five years and contrary to such an agreement, the Borrower prefers to close down the loan account at the end of the 2nd year, the bank imposes some penalty to compensate the loss of interest to the bank. Such penalty is called fore closure fee which is generally 1% of loan  amount outstanding.

With the intension of removing discrimination between existing and new borrowers and also to create healthy competition among banks resulting in offering of the floating rates at competitive pricings, the foreclosure charges/ prepayment penalty was banned the same for floating rates interest customers, from June 2012. This has also brought uniformity across the banking system.

What is pre – EMI interest ?
Home loans are repaid in monthly installments, which are  called as equated monthly installments (EMI). Normally, payment of EMI commences after the entire loan amount is disbursed. In case of purchase of a house, entire loan component is disbursed at the time of registration. In case of construction, loan will be disbursed in stages based on progress of construction and final installment on completion of construction and then the EMI commences. The interest accrued on the loan amount until the final disbursement is called pre-EMI interest. This  has to be paid by the borrower before the commencement of EMI.

For what purposes housing loan can be availed ?
Housing loan can be availed for the following purposes :
· For purchase of  plot;
· For purchase of ready-built house;
·For purchase of an apartment/flat;
· For purchase site-cum-construction purposes
· For repair and renovation of the existing building.

What are the eligibility conditions for availing home loan?
Different banks and financial institutions have their own eligibility conditions for availing home loans. Generally the following conditions are to be met to become eligible for home loan.
1)   Must be an Indian Resident  or NRI
2)   The applicant must be above the age of 21years at the time of commencement of the loan.
3)   The maximum age at the time of maturity of loan must be below 65 years.
4)   The applicant can be either salaried or self employed.

What are the loan repayment period options?
The repayment period normally is in the range of 5 years to 20 years.

Whether any securities are required to avail home loan?

In most of the cases, the property to be purchased, itself will be mortgaged as security to the lending institutions till the entire loan is repaid. But, in exceptional cases the institutions may  require  Life Insurance Policies, Fixed Deposit receipts, Share Certificates or savings certificates as additional securities for the loan amount.

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