Expert Advice

Highlighting the 5 most important terms you should understand while taking home loan.

1. First and foremost you should know your Credit Worthiness which determines your loan eligibility. Factors considered here are, your Income, other sources of income if any, age factor, CIBIL status, other loan obligation, your business profile, your financial investments in fixed deposits, insurance and owned assets.
2. Check whether the property you are buying is Pre-Approved by banks and other loan lending institutions (in case you are purchasing a new / under construction property). Pre-approval means that the title search, legal & technical of the project is already verified by the banks.
   In case you choose to buy a resale property, you need to know what is the prior chain of agreement with Index II, OC & Plan Copy.
3. Get yourself updated with the processing fees, administrative fees, mortgage intimation Charges you pay for applying home loan.
4. When you take the loan disbursement banks asks for the PDC Cheques. These cheques are addressed to the banks, state the exact EMI amount and are signed by you.
5. Understand the terms EMI and PRE-EMI. ( EMI = Equated Monthly Installment ) When you buy an under construction property, loan amount is partially disbursed to the builder. Only interest payments are made on the amount. These interest payments are known as PRE- EMI. You also get the tax benefits on the PRE-EMI. In EMI you start repaying the principal amount even before you get the possession, thus reducing the total cost by reducing the tenure of home loan. EMI payment is more beneficial in the long run.

When taking a home loan, choosing between fixed and floating interest rates is usually a confused decision for most borrowers.

1. Fixed rate of interest means that the rate of interest remains unchanged for the specified duration of the loan. This means you do not benefit, if rates of interest drop in the market. Similarly you do not lose if rates of interest increase. Under fixed home loan rates also, banks retain the right to increase the rate of interest after the prescribed interval. This provision is mentioned in the loan agreement. This is known as reset clause in the fine print.
2. Floating rate of interest fluctuates according to the market lending rate. This means you stand the risk of paying more than you budgeted for, in case the lending rate goes up and vice-a-versa.

Interest rates vary from institution to institution and presently range from 9.95% to 10.75 % for floating interest rate & 10.10% to 10.75% for fixed interest rate.

The RBI has banned pre-payment penalty on all floating rate loan, you can switch to a lower interest rate any time you like. This is not possible with fixed rate loans as you will need to pay a heavy prepayment penalty to switch to a lower interest rate.

There are three ways of offering home loan interest.

Annual reducing:

In this system, the principal, for which you pay interest, reduces at the end of the year. The interest is calculated on your outstanding principal amount at the beginning of every year.

Monthly reducing:

In this system, the principal, for which you pay interest, reduces every month as you pay your EMI. The interest is calculated on the outstanding principal at the beginning of every month which is later deducted from your EMI.

Daily Reducing:

In this system, the principal, for which you pay interest, reduces from the day you pay your EMI.

The interest on home loans in India is usually calculated on monthly reducing balance. Monthly reducing balance is the better option amongst the three as you get immediate credit for repayment and the interest component keeps reducing immediately on a monthly basis.