Fixed or floating interest rate home loan: The classic dilemma

By Joseph Samson

Whether to choose a fixed rate home loan, which is easy to budget and has an element of certainty with it or to choose a floating rate of interest that provides the benefits of decreased interest rate, is a classic dilemma that has perplexed home loan seekers for ages. Here we take a look at the benefits and drawbacks of both the fixed and floating rate home loans. Fixed interest rate home loans As the name implies, fixed interest rate home loans allow the repayment in fixed equal monthly installments over the entire period of the loan. The interest rates in such a case is fixed and doesn't change with market fluctuations. During the early part of loan tenure the majority of monthly payments are used to service the interest and principal is served in the later parts of loan tenure. Benefits of fixed rate home loans The benefit of such loans is that because the interest rate is fixed, even if the market pressures push the interest rates to high levels, the borrower pays a fixed Equated Monthly Installment (EMI). A fixed rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule, which is easy to budget and doesn't fluctuate. Thus fixed rate home loan brings a sense of certainty and security. Drawbacks of fixed rate home loans The major drawback with fixed rate is that it is usually 1 - 2.5% more than the floating rate home loan. Secondly, if for any reason the interest rate decreases, the fixed rate home loan doesn't get the benefit of reduced rates and the borrower has to repay the same amount every time. Another area of concern is whether the fixed rate home loan is 'truly fixed' or fixed for just few years. This has to be ascertained while taking the home loan. A 'fixed' home loan, which can be changed every few years will definitely wipe out the very spirit of such a loan. Experts agree on the fact the fixed rate are a better option if the economic scenario promises a rise in interest rates in near future. Floating rate home loan Floating interest rate home loans are tied up to a base rate plus a floating element thereof. So, if the base rate varies the floating interest rate also varies. Benefits of floating interest rate home loan The biggest benefit with floating rate home loans is that they are at least 1%-2% cheaper than fixed interest rates. So, if you are getting a floating interest rate of 11.5% while, the fixed loan is being offered at 14%, you still save money if the floating interest rate rises by up to 2.5%. Even if the floating rate goes over the fixed rate, it will be for some period of the loan not for the entire tenure. The interest rates will surely fall over a long period and thus floating interest rate brings

a lot of savings. Drawbacks of floating interest rate home loan The drawback with floating interest rate is the uneven nature of monthly installments. This makes it difficult to budget with floating interest rate home loans. As seen in recent times due to the hike in floating home loan interest rates, the borrowers had to shell out thousands per month extra as their EMI's, throwing their entire budget out of order. Conclusion When it comes choosing the interest rate regime, majority of home loan borrowers, in fact over 90% of them go for a floating interest rate home loan. Finally, it is up to the borrower to decide on what suits him the best. Ideally the borrower should compare home loans for various parameters and understand every single detail about it. If certainty and security are prime consderations, a fixed rate home loan will be the best, however it won't come without the premium on interest rates.

TAX BENEFITS ON HOME LOAN IN INCOME TAX IN FY 2013-14

APRIL 23, 2013 BY ALOK PATNIA

Income tax benefits on home loan can be divided in 2 components Principal component in EMI Interest component in EMI

The principal and interest component EMI will get different tax benefits. Tax Benefits on Principal Component of Home Loan You are eligible to claim tax benefits under Section 80C for the principal repayment of a home loan. You can claim deduction up to 1 Lakh along with all other permissible instruments like, life insurance premium, PPF, ELSS, NSC etc. You are eligible for this benefit only if the loan is for a self occupied house. But if you are staying in another city for job and have house in another city, then you can claim this benefit even if the house is not self occupied. Tax Benefits on Interest Component of Home Loan For those who are planning to buy a home this year, tax exemption on home loan interest payment has been increased by Rs. 1 lakh in the recent budget. This is in addition to the existing exemption of Rs. 1.5

lakhs. In total, this year you can claim a deduction of Rs. 2.5 lakh for interest paid on your home loan. Along with this you can enjoy the exemption of Rs. 1 lakh on payment of principal part of home loan as usual. But, this exemption is allowed only under the following conditions. The increase in exemption limit is only for this year alone. This increase in exemption limit does not apply to existing home loan takers. It is only for the loan sanctioned by the financial institutions during 1st April 2013 to 31st March 2014. The loan is taken for your first home i.e., you as a taxpayer do not already own a residential property on that date. The value of the property does not exceed 40 lakhs. The loan amount does not exceed 25 lakh.

The additional deduction on interest payment of home loans can be claimed in assessment year (AY) 2014-15. In case you are not able to exhaust the limit in AY2014-15, the balance can be claimed in AY2015-16. Thus, buying a home is considered both an investment as well as an act of fulfilling a dream of living in own house. From a financial perspective, home loan is considered a good debt because you get tax exemption on loan payments and at the same time your asset appreciates with time.