Can the interest on my fixed home loan increase?

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Five years ago, I was sanctioned a Rs 10 lakh (Rs 1 million) home loan for a period of 15 years.

Of that, I took only Rs 8,80,000 from the bank.

After two years, I paid Rs 2,80,000 back to the bank.

However, I am paying the installments for last three years on the original amount of Rs 10 lakh.

Shouldn't my monthly installment be reduced because the loan amount is only around 60% of the original amount?

Also, can I take another loan against this property now?

- Deepak Maini

Most banks typically keep the installments the same and reduce the loan tenure to reflect prepayment (or, in your case, the lower loan amount you availed of).

Please check the annual statement you have received from the bank; this should correctly reflect the amount of interest and principal paid by you so far.

You can also check with the bank on the balance loan tenure left in your case.

Sure, you can take a loan against this property.

It will be based on the market value of the property as well as the loan amount you are eligible for. The latter will be based on your current income as well as your repayment track record on your existing loan.

If all factors are favourable, you should get an additional loan from your existing lender itself. If they are not willing to provide the loan, you can consider shifting your loan to another lender who will take over the existing loan and provide an additional loan.

• Got a home loan but want to sell?

I am talking to IDBI Bank for a home loan. I have been told that the fixed rate is not actually fixed. If the market interest rate shoots up beyond a particular limit, the fixed rate is bound to change.

For example, let's say I opt for a home loan today at an 8% per annum interest rate. Assume, after a while, that the market rate shoots up to 11%. In that case, IDBI too will increase the interest rate on its loan.

- Sanjay Patil

There is a difference between fixed home loans and floating home loans.

In fixed home loans, the rate of interest remains fixed for the entire duration of the loan.

In the case of floating home loans, there is a base rate which is selected by the home finance company. As interest rates in the economy move, this base rate changes. As the base rate changes, the interest rate on your home loan changes. Read Want a floating loan? Tread carefully to understand this concept better.

Some home loan companies and banks give what are called 'true fixed rate' loans where the rate of interest does not change irrespective of what happens in the economy. To the best of my knowledge, the home finance companies that give this facility are HDFC Ltd and ICICI Bank.

The rest have a clause that allows the home finance company to increase the interest rate if the market rates shoot to high levels.

Most home finance companies offer a fixed rate loan subject to review every few years. The rate is initially fixed for, say, three years and this is subject to review at regular intervals.

It must be said that they use this flexibility with great discretion; this means, your rate of interest will not necessarily change every three years.  

HSBC has a Smart Home Loan scheme; Standard Chartered Bank calls it the Home Saver Loan. What is the tax liability on the current account maintained and the interest paid on the amount in these schemes?

Here your home loan balance is linked to a current account in your bank.

The interest you pay on your home loan is calculated on the principal amount. This would be the principal outstanding minus the amount that you have in your bank account. This is calculated every month, over and above the Equated Monthly Installment.

It is indeed a good scheme as long as you keep sufficient money in the linked current account. These loans are typically 0.50% more expensive than a normal home loan of the same amount and tenure.

As per my knowledge, there is no interest paid on the amount kept in a current account.

Hence the question of taxability or otherwise of the interest payable on the current account balances does not arise.

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