Mr.P.R. Shankara Raju, Regional Manager, LIC
Mr.P.R. Shankara Raju
REGIONAL MANAGER
LIC Housing Finance Limited, Bangalore
Our expert, Mr.Shankara Raju, will address all your queries related to Housing Loan

Your queries will be answered with pleasure
 

TECHNICAL TERMS

From the sanction of a loan to final disbursement, availing a home loan comprises numerous processes.  If you’re scouting for a home loan, here are a few terms you’ll hear from bankers and agents.  Understanding these terms will help you select a loan that best suits your financial requirements and constraints.  It will also make the process of availing the loan to appear less complicated.

Credit appraisal
This process is carried out by the bank before even sanctioning the loan amount.  How is a bank assured that you’ll repay the amount you borrow?  Credit appraisal is the solution.  Here the bankers assess the creditworthiness of the prospective borrower by appraising his repayment history and current earning potential.  They take into account how many loans you have taken in recent times and judge if you’ll be in a position to repay all without defaulting.  Your income, age, savings, nature of work, position, assets and qualification will all be taken into account during the process of credit appraisal.

Secured loan
In order to minimize risks associated with lending money, some lenders insist that borrowers attach their assets to the loan.  In case the borrower is unable to repay, the banker simply confiscates the assets that are attached to the loan amount.  Such a loan is termed as secured loan.  A loan not backed by collateral is termed as an unsecured loan.

EMI
Equated Monthly Installment (EMI) is the money that the borrower needs to pay to the bank every month, in order to repay the loan.  In case the bank hikes interest rates, either EMI is increased or the loan tenure is increased.

Amortization schedule
The amortization schedule gives the break-up of every EMI towards interest repayment and outstanding principal of your loan.

Monthly reducing balance
Assume that your interest is calculated on monthly rests.  This means that the principal on which interest is charged reduces every month.  Hence you pay less over the long run.
If your interest is calculated on annual rests, the principal reduces only at the end of the year.  In essence, in this case you still pay interest for the portion of the principal that you’ve already paid back.  This is what is termed as annually reducing balance. 

Disbursement
When the bank hands over the entire money in a single lot to the seller, we call this a full disbursement of money.   Sometimes banks release money in stages.  Like a portion even before the work commences, then another portion when the work is half way through and so on.  This is called partial disbursement of loan amount.

Prepayment penalty 
When a borrower decides to pay off a part of the loan or the entire loan amount before  the scheduled tenure, he attracts what is termed as a pre-payment penalty.  This could be as much as two percent with some banks.

Margin money
What a bank typically sanctions is not 100 percent of the cost of the flat or house that you intend to purchase.  Typically, it releases only 80 to 90 percent of the actual cost.  The remaining 20 or 10 percent needs to be put in by the buyer.  This money is called the margin.
You can get a home loan for as little as Rs. 2 lakhs to as much as 85 percent of an expensive property. Understanding these technical terms will eliminate any misunderstandings and conflicts in the future.
 
 

ALWAYS KEEP AN EYE ON YOUR HOME LOAN

Get the best deal from housing finance institutions by scrutinising all available information from time to time. Check how much are you losing out by not periodically reviewing your home loan options.

Here is a story of what happened to a borrower.  He had taken a floating interest rate loan from bank A.  The loan was contracted about three years ago when the prevailing rate of interest was about 12 percent.

When the interest rates dropped, the rate applicable on his loan also dropped.  Currently, he is being charged an interest rate of 10 percent.  (Of course this has to be seen in the context of the fact that bank A is today offering new floating interest rate to borrowers at an interest rate of eight percent).

But that is not the twist in the story.  The real twist comes now.  He wanted to shift to a fixed interest rate regime as well as get an additional amount as top-up to extinguish some other debts he had.  Accordingly, he approached bank B.  Among the documentation that he was required to give to transfer his balance to bank B was a letter from bank A, which gave his outstanding to date.  When he made a request for such a letter, he promptly received a call from bank A.  After the preliminaries, an officer came on the line and offered to drop the interest rate applicable on his loan from 10 percent to eight percent, a drop of 200 basis points.

When he questioned the bank A officer why the rate adjustment was not offered earlier, he was told that the financial institution does not offer such readjustments on its own, if customers approach it, they are always open to such negotiations.  To be fair to bank A, such readjustments are actually an industry practice.  Of course there is a charge for it – one would have to pay a transfer fee of 0.5 percent of the outstanding principal amount.  But unlike their normal practice, this is one facility that housing finance institutions would not want to talk too much about.
 
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