This piece covers some of the most critical home loan terms that you will need to know.

Margin

Margin is the down payment which you are supposed to pay when you book a property to buy. The difference between the amount of loan that your bank will provide you with and the total value of the property is the margin. So, if you are planning to buy a property of Rs.80 lakhs and your bank is providing you 80% of the loan amount, then you must bear the cost of the remaining 20%. So, the margin will be Rs.16 lakhs.

Base Rate

The base rate is the rate of interest that is set by the central bank. Your lender cannot offer you any interest rate which goes below this benchmark rate. The floating home loan interest rate changes per the changes in this base rate.

Floating Interest Rate

A floating interest rate is one type of interest rate offered by lenders where the rate of interest being charged is sensitive to market conditions. If you choose a floating interest rate for your home loan repayment, then your interest rate can both increase and decrease at specific intervals, along with the market conditions.

Fixed Interest Rate

As indicated by the term itself, this type of interest rate is fixed. In this case, your interest rate will be fixed before you opt for a loan. Your EMIs will not vary for the entire tenor, and this interest rate is not affected by changes in the base rate.

Tenor

Tenor is the time of a home loan that is specified by the lender. You must pay off your loan amount, both the interests and the principal amount, within this specific time span. Tenor can be of 20 to 25 years, while in some cases lenders also offer tenor of 30 years. The higher the tenor, the higher your interest will be.

Resale

Resale is a term that indicates that you are not buying a home straight from the builder but from a prior owner who is willing to sell it. It indicates that the home you are buying is not brand new, and in that sense, is a resale.

Joint Ownership

Joint ownership indicates that the property is jointly owned by two individuals. In most cases, these individuals are spouses. In the case of joint ownership, the financial responsibility of loan repayment is equal for both applicants.

Offer Letter

Also known as the home loan sanction letter , this is a formal letter that marks confirmation of a loan by the bank. The bank will send out an offer letter that acknowledges that it recognizes you as an eligible customer for a home loan, spelling out your loan terms and conditions clearly on the document.

Collateral

Collateral, which is also termed as security, is an asset which you need to provide the bank against the loan. Home loans are big-ticket loans, running into lakhs and crores and your lender needs a security against which they can sanction the loan. So, this collateral acts as an asset in case you fail to repay the loan within your tenor.

Post-dated Cheque

A post-dated cheque is a cheque that is addressed for a date in the future. These cheques can never be processed ahead of their time. The banks often ask you to supply them cheques for at least a year, or at times two to three years.

Disbursement

When the loan amount is released to you by the bank, the process is called disbursement. Disbursement is done after the bank has verified all your relevant documents. It is called full disbursement if the entire loan amount is disbursed at once, and partial disbursement if the bank disburses its smaller instalments.

LTV or Loan to Value Ratio

The loan to value ratio tells you what percentage of the property’s value can an applicant get as a loan amount – in the case of a home loan, this is the total cost of the property you are purchasing and in the case of a loan against property, it is the total value against which you’re seeking a loan. So, if the property for which you are taking loan amounts to Rs.1 crore, and the bank offers you a loan of Rs.65 lakhs, the LTV is 65%.

Equated Monthly Instalments or EMIs

EMI or the Equated Monthly Instalments is the monthly payment that you must give to the bank, through the act of paying back your loan. The EMIs are a combined amount of the interest and the principal amount after the amount has been disbursed fully by the bank. In case the bank has made partial disbursement, then EMIs are paid on the amount that has been disbursed, and it is called Pre-EMI.

Credit Appraisal

A bank must evaluate your financial status before it grants you a loan. This evaluation is called credit appraisal. The bank does an assessment to find out if you are eligible for the loan or not.

Foreclosure

If you can pay off your loan amount in full before the end of your tenor, then it is called foreclosure. In foreclosure, you will pay the remaining loan amount in a single go and not in EMIs.  

If you are planning to avail yourself of a home loan, we hope this glossary of terms related to home loans and real estate will help you read the fine print of your home loan agreement in a better way and negotiate a satisfying deal with your lender.