Tag Archives: Loan

Fixed Or Floating Interest Rate Home Loans: Which One Is Better ?

To take a home loan is a great commitment and one classic dilemma that all home seekers face is ,whether to opt for Fixed Interest Rate Loans or Floating Interested Rate Home Loans ?? Should you pay more premium in Fixed Interest Rate Home Loans or should we enjoy the changes to interest rate owing to fluctuating market in Floating Home Loans ? Should you ensure peace of your mind by opting for fixed home loans or take a risk by going for Floating Loans ?? These are some of the classic questions, most home-buyers have. This blog-post tries explaining the Pros and Cons for both, Fixed Interest Rate as well as Floating Interest Rate Home Loans.

So the first thing is to understand what is a Fixed Home Loans and a Floating Home Loans ??

Fixed Home Loans:
As the name suggests, we repay the loan amount at fixed interest rate with fixed EMI (Equated Monthly Installment). Interest Rate remains constant during the entire loan-tenure and does not change with market fluctuation.

Pros Of Fixed Home Loans:

  • A rise in interest rate will not affect your loan repayment amount or your monthly EMI (Equated Monthly Installment)
  • It allows you more freedom and peace-of-mind to plan your financial liabilities accordingly, as you have to pay a fixed EMI, even though market (and hence interest rates) could be fluctuating. Thus it also gives a sense of financial security.

Cons Of Fixed Home Loan:

  • The interest rate for Fixed Home Loan is usually 2 % more than the interest rate of Floating Home Loan for same tenure.
  • If the interest rate in market decrease by any chance, Fixed Rate Home Loan borrowers will not get any benefit out of it.

Floating Home Loans:
It is also called Adjustable Rate Home Loans. In this scheme, the interest rate is dependent on market and fluctuates according to economic situation in the country.

Pros Of Floating Home Loans:

  • If interest rate in market is reduced,you will get immediate benefit of it and you have to repay lesser loan amount than earlier.
  • Floating Rate Home Loan is availed at lower interest rate than Fixed Rate Home Loan.

Cons Of Floating Home Loans:

  • If inter­est rate rises, the bor­rower has two options : The first one is to increase the EMI, keep­ing the tenure constant or to keep the EMI con­stant, thereby increasing the tenure. Irrespective of which option you choose for, you are essentially shelling out more money from your pocket.
  • There is always an element of uncertainty surrounding your loan amount, especially during volatile market scenarios. So financially you run the risk of repaying an amount, more than you may originally have planned for.

Conclusion:
The first thing that we should keep in mind is, this is not a one time decision whether to go for Fixed Rate Loans or Floating Rate Loans. Most of the banks and financial institutions allow their customers to change it afterwards, if they want to. So if you are having a Fixed Interest Rate Loan, you can switch to Floating Interest Home Loan and vice-versa. But, it is not free and there is a cost associated with the same, So it is always better to take a thoughtful decision at the start i.e, at the time of applying for the loan. Try to compare the interest rate that your Bank/Financial-Institution is offering for Fixed and Floating rate home loans and weigh it against your loan-tenure. If you are going for a long tenure and don’t want to take any risk, then a Fixed Rate Home Loan is recommended. But if you go for short tenures, then you should opt for Floating Rate Home Loans. In the short term, interest rates may not fluctuate much, so paying a 2% (or more) premium for a Fixed Rate Loan is not a very good idea. At present, over 90% of the home loan borrowers opt for Floating Rate Home Loans.

Joint Home Loans and Tax Benefits

If you have a dream of purchasing a home, but are worried about the Home Loan Amount, bank is going to sanction against your current income, relax… take a deep breathe and calm down. Usually, Banks do not allow a person to borrow to an extent where their monthly EMI(Equated Monthly Installments) payment exceeds more than 40-50% of their monthly income. If you are in a similar situation and your current income is not high enough to ensure the Required Home Loan Amount, there is a smart option that you can exercise. You can (and in fact should) go for a Joint Home Loan with your parents or spouse as co-borrower(s) of the property. With co-borrowers/co-applicants around, for Loan-Amount-Calculations,  Bank will take into account the income of all the applicants involved. Some banks even allow siblings as co-borrowers, so you may have to check with your bank, if you can have your brother as co-borrower.

But before you jump to a decision of taking Join Home Loan, it is certainly advisable to be aware of the Pros and Cons of taking a Joint Home Loan.

Pros:

  • If you need a higher loan amount but your salary is not enough to get required loan amount, Joint Home Loans is the way for you.
  • All co-applicants are eligible for getting tax rebates under Section 80 C for principal repayment(Subjected to a Maximum Amount of Rs 1 Lakh) and under Section 24 for Interest Repayment(Subjected to a Maximum Amount of Rs 1.5 Lakhs). So if a couple is taking a Joint Home Loan, in theory  they could collectively claim Tax Exemptions under Section 80 C for Principal Payment of Rs 2 Lakhs and under Section 24 for Interest Payment of Rs 3 lakhs. Though the Actual Tax Exemption depends solely on the Monthly EMI being paid.
  • Both the owners would have to show the Rental Income in Proportion of their ownership. So if your brother has a 40% stake in the house and you have 60%, for tax purposes, 40% of rental income from the house will be added to your brothers’ annual income for that financial year, while you will be responsible for rest 60% amount.

Cons:

  • In case of any dispute arising between the borrowers/owners, it could create problems, so you want to play safe, especially with your wife 😉 you should not go for it.

Apart from these, there are some important points which you need to keep in mind, before taking Joint Home Loans:

  • You should be a co-owner to enjoy tax benefits of a Joint Home Loan
  • A maximum of 6 co-applicants are allowed to be part of a Joint Home Loan.
  • You should be a co-applicant of the home loan to get tax benefits out of it.
  • Tax Benefit to individual borrowers  is available in proportion of the EMI paid by them. Say for example, you are paying 70% of the EMI and your wife is paying rest 30% , you will be able to claim tax-exemption only on your 70% payment. Similarly, your wife can also enjoy tax-benefits on her 30% payment.

So enjoy your dream house with your spouse as a Joint-Owner as well as Joint-Borrower 🙂

Save Taxes and Get Decent Returns by Investing in Infrastructure Bonds

Did you know that by investing in Infrastructure Bonds, you could save taxes up to 6000 Rs and get an annual return of nearly 8% on your investments !! Last year, Government had announced a new income tax section 80CCF, which allows tax exemptions on investments made in infrastructure bonds. This is over and above the Rs 1,00,000 limit allowed via Sections 80C ,80CC and 80CCD. The limit on such investments has been kept to Rs 20,000.

So, if you are an individual having an income in the 30% tax bracket(taxable income more than 8 Lakhs), you can save Rs 6,000 of tax. For people belonging to 10% tax bracket(income between Rs 1.6 to 5 lakh), this figure would be 2060 Rs, while for those falling in 20% tax bracket(income between Rs 5 to 8 lakh), tax savings will be Rs 4000.But its not without clauses, though. A 5-year lock-in period for your investment is compulsory to avail tax benefits. But the good thing is, you will be getting about 8% returns, compounded annually, on your investments. If you want to, you can also choose to lock your investments for a period of 10 years and you will be getting an additional close to 2%  annual returns, effectively a ~10% return, on your money.

But again, all this makes sense, only when you have exhausted your 1,00,000 investment limit underneath 80C* sections. But given that 80c* includes Provident Funds, Housing Loan Principle Pre-Payments and various other  common categories, its not unusual for most of us(especially in higher income brackets) to hit the Rs 1,00,000 limit. So if you are looking for long term investments promising decent returns and offering tax-benefits at the same time, Infrastructure Bonds could be the right investment avenue for you.

Invest it, forget about it, claim tax exemptions of up to 6000 Rs, sleep for 5(or 10) years and get about 8%(or 10%, if invested for 10 years) returns, compounded annually, on its maturity. Now is not that cool ??

At present, IFCI Tax Saving Long Term Infrastructure Bonds are available for purchase till 12th Jan 2011. More details can be found at their website http://www.ifciltd.com/IFCIBonds/InfrastructureBonds/CurrentIssue/tabid/218/Default.aspx