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. 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.
What is pre – EMI
interest ?
Home
loans are repaid in monthly installments, which are called as equated monthly installments.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 Property 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 which 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 site-cum-construction
purposes
· For repair and renovation of
the existing building
More,
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