Choosing between fixed and floating rates

I have a home loan with a leading NBFC at 10.5 per cent in October 2010.When they gave me an offer letter, they mentioned that my EMI would be Rs 28,500 and said the EMI will start only after full disbursement of the loan, till which I was forced to pay pre-EMI when I was prepared to pay the EMI. The loan was disbursed in February 2011. The EMI was fixed at Rs 30,750. Is the NBFC right in doing such a thing? Secondly, because of the interest rate hike the tenure was increased to 25 years (from 20) and later the EMI was increased to Rs 32,500. Is it better to hold on to the property or sell it (of course, with very little margin, not even covering the loan amount and the EMI I have paid)?Raghavachari

Immovable assets are long-term assets and there is no point taking emotional decisions just because EMIs are increased due to rising interest rates. One of the common mistakes we come across with home-loan takers is that they tend to stretch it to the point that it affects their finances seriously. Though it is true that with steep increase in real estate prices, those with single income wishing to buy a home within the city limits are forced to stretch and avail loan to the maximum permissible limit.

In your case if you find that servicing the home loan EMI is difficult, don't sell and settle the loan; first check with your lender whether they are offering step-up facility (increasing EMI over the years). If it is available opt for it. If your lender is not offering such a facility you need to meet the deficit only with the internal accrual. Because, if you switch the loan it will cost you more and it will take time to recover the cost. With interest rates unlikely to moderate over the medium-term, the pressure on EMI is not likely to lessen in the near term. Once your financial situation improves, step up your EMI to bring down the interest outgo.

As long as you are in a floating rate regime, any increase in prime lending rates (PLR) means that your cost of borrowing will go up accordingly. Even if the offer letter quotes a lower interest, prevailing interest rate at the time of final disbursement will be applicable to the borrowers. Hence, increase in your EMI is the effect of interest cycle and your lender has the power to increase your EMIs.

As long as the final disbursement is not made whatever the interest you pay should be within the ambit of pre-EMI and EMI would commence from the month after the final disbursement is made.

I would like to avail of a home loan for approximately Rs 20 lakh. Is fixed interest rate or floating rate better? Which bank should I choose? What are the things that I should check before taking the loan?Rajesh

Given the steep increase in the interest rates over the past one year, home loan rates may be close to its peak. Softening of interest rates is visible in at least some home loan segments. After a series of hikes, a few banks have lowered their base lending rates by 0.25 per cent. If this is any indication of the future, interest rates may stabilise or are likely to come down in a year. So, it's wise to go for floating interest rates. Most of the banks and financial institutions offer interest rates in the same band.

Look out for the charges such as pre payment, pre-closure and processing. Besides these, service is most important factor. Some banks may offer 0.25-0.5 per cent lower interest rate, but there may be limitation in some services. Do check all these parameters before availing the home loan.

In my wife's company car loans are offered at 4 per cent discount to the market rates. But till we close the loan, the registration book will bear the employer's name. Is it better to take a loan from the employer or is it advisable to take it from my bank?Sridhar

Salaried employees are not eligible for depreciation benefits on their income while calculation tax. Hence, the RC book matter is not an issue. However, when the employer transfers the car in your name, you will become the second owner and this may reduce the value of the vehicle. If you can ignore that, it appears to be prudent to avail loan from the employer. For example, a loan of Rs 5 lakh for 48 months with interest spread of 4 per cent will save you Rs 44,000.

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