Make the correct choice
| Choosing the right home loan option is as important as picking up the
right piece of property. |
DECIDE CAREFULLY: Property buyers need to be more knowledgeable about their
home loan options these days.
The rising interest rates may be good news for those who invest in bank
deposits. For property buyers looking for home loans, the current scenario is
not really comforting.
Not only have interest rates gone up by 2-3 per cent in the
last 12-18 months, even banks have tightened their lending norms. Vijaya Bank,
for instance, has taken a conscious decision to lower its exposure to property
loans going forward and according to the bank's Chairman and Managing Director,
Prakash P. Mallya, a number of other sectors such as infrastructure and
manufacturing would become key borrowers in the coming year.
Fixed or
floating
In such a scenario, property buyers need to be more
knowledgeable about their home loans than in the past and with interest rates on
the upswing, the debate between fixed and floating rate option has become more
crucial than earlier.
For instance, floating rate would be a natural choice when
interest rates are on the downward trend or when they are static. On the other
hand, fixed rate would be an automatic option when the rates are on the rise.
But the task gets even more challenging because nobody can
get a fix on the interest rate movement. But our task is to make matters easy
for you and when you shop for your property, there should be no dilemma on the
loan option.
Fixed or floating? In the current interest rate scenario, you
may be tempted to believe that fixed is the best option. However, please
remember that even in a fixed loan option, the interest rate is not fixed
forever. Most fixed loans carry a clause which allows the banker to increase the
interest rate in the event of steep hike in interest rates. As a result, most of
the home loan rates are linked to the primary lending rate. However, borrowers
often tend to ignore this fact.
Fixed loans would be best suited when the loan period is for
a longer period, ranging from 15-20 years. Also, keep in mind the fact that
fixed loans generally carry a higher interest rate than a floating rate.
Floating rate, on the other hand, is ideal for those looking
for a short tenure loans. Ideally, go for this option if your loan is for less
than 10 years.
The biggest advantage is the interest rate is lower on
floating rate loans and most banks don't charge penalty in the event of
pre-closure of loans.
A floating rate works to a great advantage for short-term
loans with five-year tenure because even in the event of a rate hike, it would
not be expensive.
Though home loan rates have gone up in recent times, banks
have tended to keep this hike to 0.25-0.5 per cent at one go.
Since the difference between a floating rate and fixed loan
has generally been 0.75-1 per cent, you don't lose much if the loan tenure is
for five years.
Flexi loan
Make the best of both: A flexi loan product is an ideal
solution for someone who can't take a call on interest rate.
Many banks offer this product which is a combination of fixed
and floating option which allows the borrower to switch from one option to
another, a limited number of times.
Even those looking for a home loan with a tenure of 10 years
can look at this option as it offers flexibility. But read carefully the fine
print relating to the number of switches because it is very crucial in a flexi
plan. Also, check out whether you can do the switch free of cost.
Despite the rising interest rates and property prices, if
investors are still flocking to real estate, it is largely due to the huge
potential and tax benefits. As you are aware, interest paid on home loan up to
Rs 1.5 lakhs offers tax benefit. In fact, this is the biggest tax benefit for
those in the 30 per cent income tax bracket.
Also, property, along with equity, has proved to be an asset
worth investing for decades. Both are necessary for any individual's portfolio.
Not only do you need to invest in property for your living
but also as a piece of investment. Pick your property with the right loan
product.
SRIKALA BHASHYAM
Courtesy: Property Plus, The Hindu
http://www.hindu.com/pp/2007/02/03/stories/2007020300690200.htm
