Tag Archives: Mortgage 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.

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ICICI Bank New Home Loan Scheme Launched

Festive season has come, but the great reason for our happiness is that the ICICI Bank which is country’s largest private sector lender, has come into festive mood and introduced a 1 year and 2 year fixed cum floating interest rate scheme for home loan.


The new ICICI schemes at a glance:

Loan Amount

Fixed Rate of Interest (%)

Upto 25 lakh

10.50 – 1 yr

10.75 –  2 yr

25 – 75 lakh

11.00 – 1 yr

11.25 –  2 yr

Above 75 lakh

11.50 – 1 yr

11.75 –  2yr

The  current base rate for ICICI bank home loan is 10% but the problem for customer is it’s increasing day by day, so these both schemes are very lucrative.

1 Year Scheme:
In this scheme, Interest Rate will be fixed for first 1 year, after completion of which which it will be same as current market rate.  Interest rate also depends upon the home loan amount. For loan amount up to 25 lakhs  the fixed rate of interest is 10.50% and for 25 to 75lakhs the  interest rate is 11% whereas for above 75 lakhs loan amount  it is 11.50%.

2 Year Scheme:
It is similar to 1 year scheme. In this the interest rate for loan amount up to 25 lakhs is 10.75 % for 2 year and 11.25 % for 25 to 75 lakhs whereas it is 11.75 % for the above 75 lakhs.

If we compare the interest rate across both these schemes, interest rate is more than current market rate, but we should also keep in mind that, rates are not steady and in fact are increasing gradually, so Fixed Interest Rate will help you save your money.

But some financial advisor as Suresh Sadagopan, principal planner, Ladder7 Financial Advisors has said “Borrower should definitely go for One Year fixed Rate Scheme, as there will not be any significant shift of rate cycle in the next one year. However, the Two Year Scheme does not look very lucrative for a home loan buyer. Rates may fall below fixed rates in next two years, as rates are expected to come down after a year, after witnessing a year of unprecedented interest-rate hikes”

So celebrate your festival and save your money by availing these attractive Home Loan Offers 🙂

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 🙂

Tax Benefit On Home Loans And Economics Of Purchasing Second House

All of us have a dream of owning  a house, no matter how small or big it may be. But one should not think of purchasing a house being just an emotional decision, in reality, it is one of the safest bet for your investments and a very good avenue for reducing income tax liability. Under the Income Tax Act, 1961 All Resident Indians are eligible for certain tax benefits on some portion of principal and interest components of their Home Loans.

There are two ways, in which you will be benefited, when you purchase a house and take a home loan. First one being Tax Exemptions and second one being the Usually High-Returns on your Investment made against your house, simply because of ever-rising property prices. With the recession all but over, housing sector is going to witness yet another boom. So if you have not bought a house yet, this could very well be your shot at redemption 🙂

Tax Benefits on First Home Loan:

If you purchase your first house, by-default it is taken as self-occupied. You will enjoy tax-exemptions via following two ways

  • Up to Rs 1 Lakh for Principal Repayment that can be claimed under section 80 C
  • Up to Rs. 1.5 Lakh on Interest Repayment, that will be deducted from your taxable income under Section 24.

Interest repayment comes under the heading of ‘Income From House Property‘ and is taken as a loss or negative amount.

Tax Benefit On Second Home Loan:

If your disposable income is high enough to afford a second home, then you can enjoy even more tax-benefits than the one you did on your first home !! Even though, you may already have a home loan running, banks are generally more than willing to finance your second house as well, provided your income is high enough to convince them about your loan-repayment-capability. Most of the people either let out their second home for rental income or make it the place for other family members.

Second house is not taken as a self-occupied house and you have to pay taxes for rental income from it. This income is calculated after deducting up to 30% on maintenance expenses and property taxes. You will again enjoy tax-exemptions via following two ways

  • Up to 1 Lakh for Principal Repayment under section 80 C
  • Unlimited Exemption on Interest Repayment, albeit with a difference. Loss from house property is calculated as Annual Interest Repayments minus the Adjusted Rental Income and this differential amount is  eligible for tax-benefits.

As you can see, there are more tax-incentives in store, when you go about buying the second house. But you should have enough money in order to afford a second home. Apart from owning a second house and earning a rental income, you also get more and more tax-exemptions. Now this is what we call Sone Pe Suhaga 🙂 Isn’t it ??

So…..when are you planning to buy a house ?? your first one, may be your second one 😉