Fixed or floating home loans: which is better?

Akash asked, Hello. Though this may not be exactly your area of expertise, but I would want your feel on whether this is the right time to buy a house? My concern is more from the real-estate value whether it will increase or decrease and secondly whether the home loan rates will increase or decrease moving ahead? Pls advise. Thanks!

Harsh Roongta answers, At Apnaloan.com we have always advised our clients that they should avoid trying to time the market when the property is being bought for your own residence. That advise still holds good though given the current scenario you could possibly wait for around 3 -4 months to see if the much awaited property price correction actually happens.

RaviKumar asked, Hi. Recently I have taken a housing loan from LIC to buy a 3-bed room flat which is under construction and is expected to be completed by Sept '07. LIC released part of the total sanctioned amount as the flat is under construction. Balance amount will be released in other two phases. Now I submitted the loan amount papers in my office to claim tax benefits for home loan. But I came to know that tax exemption could be claimed only on the principal amount and not on the interest amount. Is it so??? If that is the reason from when I can get full tax benefits. Please explain. Thanks.

Harsh Roongta answers, I'm very sorry to disappoint you but no tax benefits (neither principal nor interest) will be available for the year ended March 31, 2007 since the construction is not complete. For a more comprehensive answer please check the detailed in this regard at http://www.apnaloan.com/.

Ram asked, Given the frequent interest rate fluctuation, which one would you advise for a person who would be going for a Home Loan, is it the Fixed Rate or the Floating Rate?

Harsh Roongta answers, This is one question that bothers all buyers. Fixed gives a sense of security... while you wonder am I paying too much all the time. Our recommendation on this million-dollar question is given below.

Firstly this is not a one-time decision and needs to be reviewed periodically. Secondly understand what exactly "Fixed rate" and "Floating rate" mean before you take a decision.

Fixed Interest Rate loans: These loans are normally priced higher than a variable rate loan for a similar tenure. That is, in the present market scenario while you would be able to get a floating rate loan for 20 years at 9.5 per cent interest rate, the fixed rate would be somewhere around 10.5 to 11 per cent.

The other option is variable/floating rate loans. This kind of loan is also called 'adjustable rate' home loans. Here, the interest rate is linked to a benchmark rate. Some banks use their 'prime lending rate' (PLR) as the benchmark rate. Some banks have a specific benchmark rate that they use for home loan purposes.

Typically, the interest rate applicable to your loan tends to be a certain percentage below this benchmark rate and ideally the benchmark rate should vary exactly as per the market conditions (though it rarely does – it is quick to go up but rarely shows the same alacrity while going down).

Apnaloan.com's recommendation is to go in for a transparent floating rate in today context (this answer is given in February 2007).

Vikas asked, Hi Harsh, I have recently bought a property in Navimumbai. The builder has informed me that there is a service tax applicable on the sale of new flat (4.04% of agreement value). He also informed that the matter is subjudice and I need to give him a Bank Guarantee for the amount of service tax. Please tell whether such tax is applicable as I have already paid the stamp duty and registration. Are banks giving guarantee like the one asked for?

Harsh Roongta answers, Please ask your builder to provide his service tax registration number if you have been asked to pay anything on account of service tax.

The applicability of service tax on construction contracts is disputed but is not likely to materialise. The bank guarantee sounds like a better option though the problem is that you will have to cough up the whole amount as security for bank to provide the bank guarantee to the developer. The only benefit is that you will earn interest on the same.

sanu asked, With an income of Rs 3 lakh, can a person have his/her Flat in Navi Mumbai? Will it be possible? The increasing interest rates are also creating problems for buyers. Can you help us in this regard?

Harsh Roongta answers, As a rule of the thumb you will get about 3.5 to 4 times your annual gross income as a 20 year loan. Hence you will be eligible for a loan of around Rs 11-13 lakh.

hitesh asked, Hello sir, I am planning to purchase a flat before March '07 @ Rs 25 lakh. Pls let me know which bank will be suitable for me to take the loan & what will be the interest rate?

Harsh Roongta answers, The only answer to that question is that you will have to ask around and find out which bank is best suited for your profile and your needs. Contrary to popular opinion the lending banks do not have a menu card of interest rates which is available to every borrower. The rates, the loan eligibility and the other terms and conditions vary based on who you are and what your need is.

v_gate asked, Hi have taken fixed rate home loan at 7.25% for 10 years, some 1.5 years back. What I have read recently is floating rate is better than fixed rate. Can you please let me know if I should switch to floating rate?

Harsh Roongta answers, Sir you are in paradise already. Why should you want to shift. :-) :-) A fixed rate of 7.25% means you have tied in at what perhaps was the lowest fixed rate ever. So stay put and enjoy the fruits of your correct decision made earlier.

hy asked, Hello sir, I am staying in rented house at Mumbai. My residence is in Mumbai but far away from my office both are in Mumbai. I have a loan against my residence. Can I claim HRA & housing interest or both? Please answer.

Harsh Roongta answers, Contrary to popular opinion, there is no restriction under the I-T Act to get both. Many salaried consumers take a home loan to acquire a residential property, but do not stay in that property for various reasons. They stay in rented premises for which they pay rent. If they are receiving a house rent allowance from their employer, a question frequently arises is- whether they can claim exemption of their HRA based on the rent actually paid by them as well as the interest payable on the loan taken to acquire the owned property.

This is such a widespread question that it rightly justifies an elaborate reply justifying that both deductions are available.

LoanSeeker asked, Do I get tax Exemption if I take a loan against property for construction of my house?

Harsh Roongta answers, Tax benefits are available on repayment of a loan (by whatever name called) which is taken to acquire or construct a house property. It is not at all necessary that the property that is acquired/constructed should be pledged to avail of the tax benefits. In fact even an unsecured personal loan is eligible for the tax benefits as long as it can be proved that the loan was used for acquisition/construction of the house property.

chetan asked, Hi. I have a home loan going with ICICI Bank for Rs 9.70 lakh. If I want to do a balance transfer which bank do you suggest?

Harsh Roongta answers, Assuming you have a good track record of payment for a sufficiently long period of time you should be able to get good offerings from any bank. However existing interest rates are very close to what you are paying and you will also need to pay a pre-payment charge to your existing lender as well as a fee to your new lender. So evaluate carefully before making a switch. 

BKS asked, Hi HR..... I have taken 2 houses on home loan & availing the income tax benefits. If I would take a 3rd home, is it possible to get income tax benefits? Plz clarify.

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit.

As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Iyer asked, Hello Mr. Roongta: I think Housing Finance institutions have decided to make a killing on the hapless public who have no option but to cough up the exorbitant rates charges by them from time to time. EMI on repayment of a lakh of loan has gone up from Rs 800 to Rs 1100 in a matter of a couple of years! I What do you say?

Harsh Roongta answers, I can understand your anger but you are probably directing it wrongly this time. To give you an analogy when the local shop raises the price of milk do you blame him or the general rise in prices. As far as banks are concerned you are aware of the increase in deposit rates which to a large extent is responsible for the increase in interest rates.

Perhaps the one thing on which the banks can be faulted is the complete lack of transparency in determining the increase/decrease in floating rates. It would probably start happening now.

Amit asked, Sir, I'm age 31, take home salary is Rs 45K per month, at present servicing a home loan of Rs 10 lack by paying an installment of Rs 10K., monthly expenses of Rs 25K. My questions are 1) Is this a right time to sell your old house and buy a new house? 2) My Salary is able to serve additional housing loan if any? and how much? Thanks.

Harsh Roongta answers, You should be able to get a sanction for about Rs 20 lakh loan minus your existing loan of Rs 10 lakh which means you should be eligible for a loan of about Rs 10 lakh.

chandu asked, I have two home loans. Can I avail tax benefit on both the loans?

Harsh Roongta answers, Contrary to popular opinion there is no overall restriction of Rs 1, 50,000 on the interest payable on a loan taken to acquire/construct a house property or in respect of more than one property. In fact, this deduction is available for any number of properties and is without any limit under specific circumstances.

The calculation of income from house property (which means the rent you earn) has to be done separately for each property owned by a person and the home loan repayments are eligible for deduction for each such property. The deduction for interest payable on a loan taken to buy/construct house property (ies) (if you have more than 1) is not subject to any overall limit. As explained earlier, the limit of Rs 1, 50, 000 is applicable only while calculating the income from one self-occupied property.

Palanisamy asked, Dear Mr.Harsh, I have taken partial disbursement of my home loan without any Pre-EMI. I am paying only EMI. Construction will get completed in June 2007. Can I claim the interest and principal (Rs 35,000 each) components for IT exemption for financial year 2006-07?

Harsh Roongta answers, There is a misconception that you can get tax deductions by paying EMIs instead of pre-EMI during the construction period. This is simply not true. It does not matter whether you pay EMI or pre-EMI. For the year ended march 31, 2007 you will not be eligible for any tax benefits at all as the property will remain under construction as on march 31, 2007. 

Part II: Do I withdraw PPF to repay my home loan?