Before applying for a home loan it is essential to understand the various terminologies associated with the loan. This guide demystifies some important terms, empowering you to make informed decisions and approach the loan process with confidence.

The Foundation: Loan Basics

Here are some basics that you must know about to have a better understanding of your loan:

  • Principal Amount: This is the core sum you borrow from the lender to finance your property purchase.  Essentially, it is the initial loan amount before accruing any interest.
  • Interest Rate: Think of this as the cost of borrowing. Expressed as a percentage of the principal amount, it determines how much extra money you will be required to pay over the loan tenure. There are two main types:
    • Fixed Interest Rate: This rate remains constant throughout the loan tenure, offering predictability in your monthly payments (EMIs).
    • Floating Interest Rate: This rate fluctuates based on market conditions. While it can potentially offer lower rates initially, it also carries the risk of EMIs increasing if market rates go up.
  • EMI (Equated Monthly Instalment):  This is the fixed amount you pay the lender every month throughout the loan tenure. It is a combination of both principal and interest. A higher principal component in the EMI signifies that you are paying off the loan faster.
  • Loan Tenure:  This refers to the total duration you have to repay the loan in full.  Home loan tenures typically range from 10 to 40 years, with longer tenures resulting in lower EMIs but higher overall interest paid.
  • Sanction Letter: Once your loan application is approved, the lender issues a sanction letter outlining the sanctioned loan amount, interest rate, tenure, and other loan terms. This document serves as a formal agreement between you and the lender.

Understanding Your Contribution

Now, let’s understand the terms of certain factors that determine your eligibility and are crucial for managing your finances when you get a new loan:

  • Down Payment: This is the upfront amount of your own money you invest in the property purchase. A higher down payment reduces the loan amount you need to borrow and demonstrates financial responsibility to the lender, potentially qualifying you for better interest rates.
  • Loan-to-Value Ratio (LTV):  This ratio expresses the loan amount sanctioned by the lender as a percentage of the property’s market value. For instance, an LTV of 80% means you can borrow 80% of the property value and are required to pay a 20% down payment. Generally, lenders offer higher LTVs for properties with lower risk profiles.

Early Settlements and Loan Management

Here are some facilities that can  help you repay your home loan faster that you can consider:

  • Part Prepayment: This refers to paying off a portion of the loan amount before the scheduled end of the tenure.  While beneficial for reducing your overall interest burden, some lenders might charge a pre-payment penalty.
  • Foreclosure: If you wish to close the loan prior to the set tenure, opt for the foreclosure facility. This can help you become debt-free faster and also lower your debt-to-income ratio, which helps you get new credits in the future at favourable terms. 

But, what about when you forget to pay your instalments?

  • Default: This is when you are unable to pay your loan EMIs. If it continues over a substantial period, the lender can seize the property and sell it to recover the outstanding loan amount. Thus it is important to manage and pay your monthly instalments responsibly. 

Additional Costs and Considerations

Keep the following things in mind to secure an advantageous loan offer:

  • Processing Fee:  This is a one-time fee charged by the lender to cover the administrative costs of processing your loan application.  Fees can vary depending on the lender and loan amount.
  • Fixed Obligation to Income Ratio (FOIR): This ratio compares your total monthly debt obligations (including your proposed EMI) to your gross monthly income. A lower FOIR indicates better affordability and increases your chances of loan approval. Lenders typically have a FOIR requirement they need you to adhere to.

Advanced Loan Options

Add a little more to your loan with the following:

  • Top-up Loan:  This allows you to borrow additional funds on your existing home loan. The amount can be used for home renovation, extension, repairs, and so on.
  • Pre-EMI: This applies specifically to under-construction properties. During the construction phase, you might only pay interest on the disbursed loan amount until the property is ready for possession.

Joint Ownership and Loan Management

Here is how you can ease your repayment burden:

  • Joint Ownership:  When two or more individuals co-own the property, they become jointly responsible for the loan repayment. This can be beneficial for sharing the financial burden. However, this requires clear communication and agreement between the co-owners.
  • Balance Transfer:  If you have an existing home loan, you can transfer it to a different lender offering a more competitive interest rate or better terms.   Carefully evaluate the processing fees and potential benefits before initiating a balance transfer.

Equipping yourself with knowledge and making informed decisions are crucial steps towards securing your dream home through a manageable and affordable home loan. You can start your borrowing journey by checking the various home loan offers you are eligible for on platforms like Bajaj Markets. Head over to and get started now!