Post-disbursal Home Loan Terms You Must Know

Once you have got your home loan, you are likely to run into a whole bunch of new technical terms that many find confusing. Here we describe these terms, and help you understand their context in the post-disbursal stage.

1. Construction-linked home loan: In such loans, the loan amount is disbursed according to the rate of the construction of the property for which the loan is taken. The bank does not release the entire loan at one go. You have the advantage of paying the property developer as per the progress of the property compared to funding the developer on a time-linked plan without seeing any real progress in the construction of the property.

2. Pre-EMI: Pre-EMI is a term commonly used in a construction linked home loan where the lender disburses only a partial loan amount based on the progress of the construction of the property. While the entire loan amount has not been disbursed, you still have to pay the lender some kind of monthly payment for whatever amount has been disbursed.

EMI payments comprise the interest cost of the loan and part repayment of the principal amount of the loan. In a pre-EMI payment, the borrower pays only the interest cost related to whatever the loan amount disbursed thus far is.

Once the entire loan amount is disbursed, then the full EMI payments begin, i.e., the borrower starts repaying the interest cost as well as the principal amount of the loan.

3. Amortization: The process of the gradual paying off a loan through EMI payments is referred to as amortization. In a home loan, the borrowers receive an amortization schedule, i.e., a table detailing each periodic payment with information like the amount of loan that has been repaid (the principal repayment), and the cost of the loan (the interest cost).

4. Statement of account: The statement of account is a summary of the interest and principal repaid during the year as well as the balance tenure and the outstanding loan amount. This statement ought to be provided by the lender or can be requested from them. This document is important in order to:

• a. Claim tax exemption for the year
• b. Calculate any late or cheque bounce charges payable based on the amount of loan outstanding

5. Top up loan: Top up loan allows you to take a loan on top of your existing home loan in case you are in need of funds. The loan is taken on the same property on which you already have a home loan, assuming that the underlying value of the property has gone up. So, the lender lets you "top up" your loan. You can use such a loan for any purpose, however, you have to first check if the current bank you have your home loan with provides this option.

Let's understand this with an illustration:
Karan bought a flat in Delhi 6 years ago and funded it through a home loan. Karan plans to start a business venture of his own and needs funds for it. Over the past 6 years, the value of his property has doubled. If Karan wants, he can get a top up loan against the current value of the property.

Please keep in mind the following conditions:

• a. You can top up only when you have an existing home loan.
• b. You need to maintain an impeccable repayment track record.
• c. You will not get a top up loan for the full value of your property, but rather only up to a certain limit of the property's market value.

6. Late charge: In case your EMI payment is late, you will be charged a late fee by the lender. If you are making payments through post-dated cheques (PDCs), make sure the cheques don't bounce or you will face penalty. These charges will directly impact your credit history. Additionally, if you want any favour from the lender later on, your past behaviour of late payments will affect your reputation with the lender.

7. Foreclosure: A foreclosure is when a borrower decides to prematurely pay back a loan. For instance, if you have recently inherited a large amount of funds from a relative and you decide to use it to pre-pay your home loan, you would be able to close your loan account prematurely. If you foreclose a loan using your own funds, the lender might not charge you a penalty. However, if you transfer your balance to another lender you will likely be charged a penalty.

8. Balance transfer: This means switching the outstanding loan balance from your current lender to another lender and is usually done in case the new lender is offering lower interest rates. Two items to keep in mind when opting for balance transfer are:

• a. Prepayment penalty, which is charged by the original lender, to discourage a borrower to switch lenders.
• b. The new lender you shift to will charge a processing fee to take over the loan. It can be about 0.50% to 1% of the total loan amount one applies for.

It make sense to do a balance transfer if your analysis shows that the money you would save on your EMI would be far higher than the penalties and fees you would incur. Otherwise, it does not make sense to go through the pain of a balance transfer.