Purchasing a home is always considered a long-term investment goal for many. Thus, it is important to be aware of crucial know-how about purchasing a home via a home loan. In other simple terms, a home loan assists you in finding your home purchase. Such funding can be repaid to financial institutions or banks via monthly repayments known as EMI. EMI involves principal plus the interest component on the loan amount. Alongside, the interest rate that you pay is of 2 types – fixed rate and floating rate. Bajaj Finserv Home Loan interest rate, Axis Bank home loan interest rate or rate of any other lender – most of them either offer fixed rate or floating rate facility.
Also, note that there is various jargon included in home loan transactions. Hence, the below-listed terms are aimed at helping you get a better understanding of the concept of home loans and enhance transparency between borrower and lender. The top 10 most common jargon used in the home loan process are:
Banks and NBFCs (Non-Banking Financial Companies) are usually ready to provide a loan to applicants once the legal contract is signed to pay the loan amount in the form of monthly instalment alongside interest on the loan amount. The amount is pre-calculated and decided by the lender. The borrower is required to begin repaying the amount (EMI or Equated Monthly Installments) till the outstanding loan balance amount is cleared.
While the EMI option can be provided for up to 15 to 20 years based on the lender’s decision, borrowers generally have the choice to pre-close their home loan by making a bulk repayment of the outstanding loan component. It is extremely crucial that you check the amount of EMI and accordingly apply for the loan. As a great practise, only use the 20 per cent – 25 per cent of your savings from income for EMI and ensure to maintain the remaining income for exigencies and future needs.
Margin or down payment
It is crucial to be aware that no financial institution or bank will provide you with 100 per cent financing for your home loan. Nearly 80 percent of your property value will get funded by the lender, and remaining of the value of the property will be arranged by the loan borrower. Say, for instance, and you planned to buy a property of about Rs 1 crore, the bank will lend a loan of up to Rs 80 lakh, the remaining Rs 20 lakh loan must be arranged by you, which is even called the down payment or margin amount for a property loan.
This measure is considered by financial institutions and banks to share their risk and lower their credit risk. Thus, it is recommended to check up with your lender what percent must be the margin or down payment percent as it can vary from one bank to another as per the applicant’s credentials.
Banks usually check your potential to make the repayment of your loan amount. Based on the loan amount, credibility, rate of interest and repayment tenure is determined by the financial institution or bank. As per the income, age, employer and various other information, the banks have the right to determine whether they should disburse the loan and what must be the exact loan amount as well as the rate of interest.
Every bank checks the applicant’s age, payment history, work experience, income, qualification, employer credibility and the existing debts before providing the loan amount. Such processes are conducted by the bank for avoiding the default risk.
Few of the home loan is disbursed and sanctioned in parts, which is known as partial disbursement of the loan proceeds. When loan property still is under construction, such partial loans get disbursed. The applicant holds the obligation to just repay the interest on the loan amount disbursed and not the principal component until full disbursement of the home loan. This interest period payment on a partially disbursed amount is known as Pre EMI. The Pre EMI is paid until the home project completion. The disadvantage of it is if your property completion is delayed, you may end up repaying more interest to banks.
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Banks do the sanity check before home loan approval. Due diligence checks are conducted on property or projects based on the info readily available about the project. Regardless of whether the land or property is pre-approved by the lender, buyers must be aware of the Caveat Emptor – Buyer Beware. Thus, ensure to consider that the pre-approved properties are 100 percent investment safe.
It is highly recommended to get help from a legal adviser before you invest in a property. They try to sketch a clear picture to show whether documents of the property have a clear title. Home investments through loans are a big-ticket cost, which requires adequate time for investigation before investing.
To provide a huge amount in the form of a loan, lenders or banks may request you to keep some collateral or asset in the form of security. Banks use such assets in the form of security against default of loan amount by the borrower. Loans given based on such collateral have low-interest rates, and the security serves as protection to the lender. For a home loan, generally, the property for which the loan is provided is used as collateral. In a situation, if the borrower is unable to meet the outstanding loan amount, the bank reserves the right to have ownership of the home.
Banks sell the home to recover the outstanding home loan amount. It is the only reason the lenders provide just up to 75-90 percent of the property value through a home loan. Moreover, another point you must note is that the home value is considered to appreciate, and hence up to 75-90 percent of home value ensures 100 percent return of loan amount in the situation of any default by the home loan borrower.
As part of the loan application process, the borrower issues the lending bank with a post-dated cheque for up to one to two years. These are used by the bank to withdraw the EMI in the form of ECS. A post-dated cheque basically means a cheque issued with a future date. Thus, such cheques can only be cleared after the mentioned date in the cheque.
A confirmation letter generally mentioning whether you are eligible for a home loan is known as a sanction letter. Such letters just confirm your eligibility and do not assure the amount to be disbursed to you. Note that a bank has the right to cancel loan disbursement if there is any kind of issue with the property linked title or any other issue. The sanction letter will involve the loan amount the loan seeker is eligible for, the interest rate, loan tenure and how much is the EMI (Equated Monthly Instalments).
Type of interest rate
When availing of a home loan, you should factor in the option of floating rate and fixed rate of interest. Axis bank home loan interest rate, Bajaj Finance home loan interest rate and other lenders’ rate offers these 2-interest rate options. By selecting the fixed interest rate on a home loan, lenders will require paying a fixed EMI amount till the loan tenure. On the contrary, with a floating interest rate, the rate of interest varies as per the market conditions. If the present market rate is rising, then the EMI amount will also be higher and vice versa.
With the fixed interest rate, EMI will stay unchanged, and the interest rate will also be fixed at a higher end. However, with the floating interest rate, applicants can easily enjoy the low interest and EMI component when rates of the market are low. Floating interest rates are completely dependent upon market volatility.
After the verification of all the legal documents linked with the property as well as the applicant, banks agree on disbursing the loan proceeds. Loan disbursement can be of 3 distinct ways – full, partial, and advance disbursement. When the full loan proceeds are given to the applicant by the bank before the construction completion, it is known as advance disbursement. Alongside this, banks also hold a specific amount and disburse partly during the construction period, and the remaining is released after construction completion. For the partial disbursement, the home loan borrower requires paying the interest component on the amount disbursed until project completion.