NEWS & ADVICE : HOME LOANS
Financing options for residential properties
By Joseph Samson
Feb 16, 2008
Print    Email    RSS   

The tax incentive on housing loans makes it a very viable and popular option amongst buyers for purchasing residential properties. Once the house has been decided on, then the next step is to look at the options available for financing the purchase.

A buyer would prefer to finance the maximum part of his purchase through a home loan, keeping in mind his ability to repay the loan amount on time. There are two ways available for taking a home loan- a fixed rate loan or a floating rate loan.

Before deciding on either of the options it is important to understand the basic differences between these two options, as they make a substantial difference to the cost of borrowing.

In case of a floating rate of interest, the interest rate is directly proportional to the prime lending rate of the bank (PLR), commonly known as the benchmark. Thus any variation in the PLR would cause the interest rate to vary accordingly. The banks generally review and revise their PLR on quarterly or half yearly basis.

The recent trend of falling interest rates makes this the most preferred option amongst borrowers. But if the borrower opts for fixed rate loan, in the times of falling interest rate, it would pose as a major disadvantage to him.

Fixed interest rate on loans is an option where the interest rate is the same through out the loan repayment period. The major advantage of this option is that the borrower is shielded from any increase in the rate of interest in the market.

Every bank formulates its own strategies for fixing the interest rates. Due to a non stardardised definition of fixed interest rate and floating interest rate in the market, every bank uses its own parameters to define these terms. Thus it becomes important for the borrower to analyse all the aspects of the proposal of the lender before taking the final decision.

At times the banks fix the interest rates in fixed rate loan only for a certain initial period of time of the repayment period. Once that period is over (for example, at the end of five years) the fixed interest rate is modified according to the present PLR.

Most of the times the banks fix the interest rates with the condition attached that the PLR should remain within a certain range. The rise of PLR above the upper limit of the range causes an upward shift in the fixed interest rate. In both these cases the fixed interest rate ceases to remain fixed as suggested by the definition.

Nowadays the borrowers have an altogether third option available in the market – split rate loan. In this case a part of the loan amount is subjected to fixed interest rate and the other part to floating interest rate. The option gives the borrower the advantages of both fixed as well the floating rate loan. Each bank has its own policies regarding the division of loan amount into fixed rate loan and floating rate loan.

The final choice from the options available in the market would depend upon various factors including the borrower's risk taking ability and his perception about the long term interest rate.


(Comments Posted : 0) Post Your Comments
Show All Comments
COMPARE QUICKLY
 Select a product:
 

CALCULATE QUICKLY
 Select a product:
 

EDITORS' PICKS
Home Loan: A way to reduce your taxable...
Your EMIs may help you to reduce your tax...
Home Loan Agreement: An important aspect...
Six tips to choose your home loan lender
An insight into the era of teaser loans


PINJORE: CaℒL Giℛℒs In PiNjOrE 09915787550...
PINJORE: CaℒL Giℛℒ In PiNjOrE 09915787550...
how to gate my home loan certificate

NEWS THIS WEEK
Canara Bank earned a profit of 60%. Feb 6, 2015
New Branch of Laxmi Vilas bank at Vijayawada Jan 30, 2015
Home loan EMIs expected to drop down Jan 21, 2015
Corporation Bank received MSME banking excellence award 2014 Jan 19, 2015
Home loan rates set to fall, after reduction in repo rate Jan 16, 2015
News Archive