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Glossary

Equal Monthly Installment (EMI)

Loan repayments are usually in Equal Monthly Installments over the tenure of the loan. Some banks also offer a Variable Installment Scheme were in repayments are higher in the beginning of the loan period. This is beneficial for those individuals who are trying to maximise their tax breaks in the initial years and expect future tax breaks to fall (we believe that the opposite is more likely!)

Fixed /Floating rate

Under a floating rate loan, the interest rate on the loan varies from time to time depending on the Prime Lending Rate fixed by the Reserve Bank. This change can happen as frequently as one in six months. If the PLR falls, you benefit as the effective interest rate on your remaining loan falls. However, your payments every month stay the same. The Finance Company will refund some of your EMI cheques and effectively compensates you by reducing the tenure of the loan. The reverse happens if the PLR rises, much to your disadvantage.

Choosing between fixed and floating loans

In the last 2-3 years the PLR has fallen as the Indian economy had slowed down and demand for money was low. If you expect this trend to continue, you stand to benefit from a floating rate loan. If interest rates begin to rise again, you can prepay your floating rate loan and lock in to fixed rate loan. You must them choose a floating rate loan with no repayment charges (one is offered by HSBC). However, if you do not want to speculate on interest rates and need a stable loan to help planning the future, then go for a Fixed rate loan.

Rest

Interest rates are quotes on a daily rest, monthly rest or annual rest basis. The annual rest quote implies that the company gives you the credit for the monthly principal repayments only at the end of each year. Such loans are therefore more expensive than a monthly /daily rest loan. The shorter the tenure of the loan, the greater the effective interest rate difference will be.

Processing Fee

A one time fee which is normally non-refundable and payable along with your initial loan application. Rates can vary from 1-2% of the loan amount.

Administrative Fee

A one time fee which is normally non-refundable and payable before your loan is disbursed. Rates can vary from 1-2% of the loan amount.

Commitment fees

This interest is charged if you do not draw the sanctioned loan within a period of 6-9 months. The rate of interest is usually about 1-2% a months.

Interest Tax

Housing Finance companies have to pay a tax on the interest income they receive from you. They sometimes pass this on to the customer. Always check with the company if the interest rate they are quoting includes interest tax or not. This tax normally about 2% of the interest rate charged. E.g if the interest rate quoted is 14% then the actual interest rate including interest tax is about 14.28%.

Prepayment charge

Most Housing Finance companies charge a fee for prepaying your loan before its full tenure is over. This helps them plan their finances, at your expense. Your earning capacity will normally increase with age and a prepayment fee can be a big cost. This fee also limits your ability to refinance the loan if interest rates fall after a few years. The fee is normally in the range of 1-2% of the prepaid amount.

Refinance Charge

Some Housing Finance companies do not charge you for prepayments from your own savings. However, if you retire a loan using money borrowed from another Finance Company, you will have to pay a Refinance charge of 1-2% of the loan outstanding.

Down payment

Housing finance companies would normally give a loan up to 80-85% of the value of the property. The remaining amount would have to paid by the buyer (to the seller), as a down payment before the he draws on the loan.

Tenure of the loan

Normally, loans are given for a period of 1-15 years. Some companies also give loans up to 20 years at an additional interest cost of 0.25% -0.5%. Most companies do not allow loans for a fraction of a year.

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