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.
More,
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