Important Housing loan terminologies
Amortization schedule: This refers to a detailed table of recurring loan payments that contains a bifurcation of the principal component and the interest charged in an EMI till the loan is completely repaid.
Base rate: It refers to the minimum rate of interest set by the lender. This is the benchmark rate below which the banks and other financial institutions cannot offer a home loan. Each time there is a change in the base rate, the floating rate will also be changed.
Balance Transfer/Refinance: It is a special facility that allows the home loan borrowers to switch the outstanding loan amount to another lender who offers a lower interest rate and better terms and conditions.
Credit Appraisal: Before your loan is sanctioned, the lender carefully considers your loan request by considering several parameters such as income, savings, age, employment status, and credit score. These factors help them to determine your eligibility and repayment capacity. This process is known as credit appraisal.
Disbursement: The process of releasing the loan amount from the lender to the borrower is known as a disbursement. The loan amount is disbursed only after the lending institution receives all the required documents. Disbursement can be of three types:
Advance disbursement: This refers to the case where a home loan company is willing to make the entire payment before the completion of the construction. This occurs in only these instances:
- When the buyer requests the home loan company to do so.
- If the home loan company has got convinced that the builder will complete the construction on time.
Partial Disbursement: Partial disbursement refers to the case when the lender releases only a partial or limited portion of the loan amount to the borrower. This usually occurs when the property for which the loan has been availed is under construction.
Full disbursement: A full disbursement is when the entire cost is paid in one go i.e. when the home loan company hands over the entire payment to the seller.
Equated Monthly Installment (EMI): It is the amount which is to be paid by the borrower every month, towards repayment of the availed home loan. EMI amount is the combination of the principal amount and the rate of interest.
Encumbrance certificate: An Encumbrance Certificate is a certificate of assurance that a property is free from any legal or financial liability such as a mortgage or pending loan.
Fixed interest rate: A fixed interest rate is the one that remains fixed throughout the loan tenure.
Floating interest rate: A floating interest rate is the one that keeps fluctuating or changing along with the market conditions. If you choose a floating interest rate home loan, then you need to pay a different EMI amount each month, based on the base rate.
Loan to value ratio (LTV): This is the ratio of the maximum loan amount offered by the lender to the actual market value of the property. The maximum LTV offered by the lenders is up to 90%.
MCLR: The MCLR is a reference rate or internal benchmark for the financial institution. The MCLR or Marginal cost of funds-based lending rate defines the process used to determine the minimum rate of interest on home loans.
Margin: It is the difference between the maximum loan amount offered by the lender and the actual market value of the property. In other words, Margin is also referred to as the down payment which needs to be paid by the borrower.
NOC/No Objection Certificate: This is a legal document that is issued by the bank once the loan is cleared by the borrower. It states that the bank has no objection in transferring the property ownership back to you.
Occupancy Certificate: It is a legal document issued by the local planning authority to certify that a building/property is fit and ready to be occupied. It is to be obtained before occupying a home/any property.
Offer Letter: After the loan has been approved, the lending institution releases an offer letter to the borrower, containing loan-related information such as loan amount, rate of interest, EMI amount, loan tenure, terms, and conditions of the loan.
Pre-EMI: In the case of the partial loan disbursement, only monthly interest payments are made on the amount disbursed, before the actual EMIs begin. Such a payment is called Pre-EMI.
Prepayment Penalty/Charges: A prepayment penalty is a fee that the borrower needs to pay to the bank if you decide to repay a loan before the end of its term.
Pre-Approved Property: It means that the titles and the documents of the property have been examined by a bank or other financial institutions (FI) at the request of a builder. Choosing pre-approved properties allows buyers to stay assured and avoid the hassle of legal and technical evaluation.
Resale property: This is a home loan term used when someone is purchasing a property from another homeowner, who is selling his/her property. This means that the borrowers are not purchasing a brand-new house directly from a builder/agent or a property that is under construction.
Reset Date: This date is mentioned in the reset clause of a home loan agreement. It states the period after which a fixed rate home loan will get converted into a floating rate home loan.
