Reducing balance means the time at which interest is
calculated and applied to a Loan account.
Repayment of home loan is by way of equated installments paid every
month. But housing finance companies adopt different modes of adjusting these
monthly repayments towards the Loan account and to bring down the Loan amount
due.
In annual reducing balance method, the monthly repayments
received from the Borrower are kept in a suspense account and transferred to
the Loan account only once in a year generally on 1st of April. To be more
clear, if your Loan amount as on 1st April, 2008 is Rs.5,00,000/- and you pay monthly installments of Rs.10,000/-, your
entire payment of Rs.10,000 X 12 = 1,20,000/- will be adjusted towards Loan
amount only on 01/04/2009 and interest from 01/04/2008 to 31/03.2009 will be
calculated on Rs.5 lakhs. This works out very costly as you will be paying
interest on Rs.5,00,000/- for the entire 12 months.
In case of monthly reducing balance method, the repayments
are credited to your Loan account on a particular day in a month, though you
would have paid the installment much earlier to that date. If some particular housing finance company
has fixed 15th of every month, for such adjustment, and if you pay on 5th of
every month, your Loan amount gets reduced only on 15th of that month. Most of
the housing finance companies have shifted from annual reducing balance method
to monthly reducing balance method. The
most preferable mode of payment of EMI is daily reducing method, where under
your Loan amount gets reduced on the very day of your repayment.
These are two different modes of interest calculation.
Floating rate is also called as Variable rate. In fixed rate, the rate of
interest is fixed and will not change in the entire period of the Loan. Fixed
rate will be higher than the floating rate, as it is not affected by market
fluctuations. In floating rate or variable rate, the rate of interest changes depending upon market conditions. It may increase or decrease depending upon
the change in the market conditions. The repayment period also varies, but
equated monthly installments remain the same. Presently, floating rate is most
favoured by lending institutions. If the repayment period is more than five years,
it is advisable to prefer fixed rate.
In flat rate, the interest is charged on the full amount of
Loan for the entire period, irrespective of your repayments. If you have
availed Loan of rupees ten lakh repayable in ten years, interest will be
charged on rupees ten lakh for all the ten years, ignoring your repayment.
This is a fee charged by the bank / financial institutions
if loan account is closed before the agreed period. If the bank and Borrower
have agreed for a repayment period of five years and contrary to such an
agreement, the Borrower prefers to close down the loan account at the end of
the 2nd year, the bank imposes some penalty to compensate the loss of interest
to the bank. Such penalty is called fore closure fee which is generally 1% of
loan amount outstanding.
Home loans are repaid in monthly installments, which
are called as equated monthly
installments. Normally, payment of EMI commences after the entire loan amount
is disbursed. In case of purchase of a house, entire loan component is
disbursed at the time of registration. In case of construction, loan will be
disbursed in stages based on progress of construction and final installment on
completion of construction and then the EMI commences. The interest accrued on
the loan amount until the final disbursement is called pre-EMI interest which
has to be paid by the borrower before the commencement of EMI.
Housing loan can be availed for the following purposes :
· For purchase of
plot;
· For purchase of ready-built house;
·For purchase of an apartment/flat;
· For purchase site-cum-construction purposes
· For repair and renovation of the existing building.
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