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A true 8216;fixed8217; interest rate is one,which remains fixed during the entire tenure of the loan. Some banks offers fixed rate with a reset clause of 2-5 years. Very few banks offer actual true fixed interest rates. Currently June 2011 the interest rates on such true fixed rate loans are in the region of 12.5-16 per cent. Moreover since the home loan is taken for a reasonably longer period it is advisable not to take fixed rate interest loan,unless you feel that the rate of interest is at the lowest in the interest cycle.

I have borrowed Rs 12.5 lakh with a tenure of 10 years. Can I pay an amount exceeding my EMI per month to save myself from interest rate burden? Please guide me as to what are the other suitable ways to save myself from interest burden.

Ramesh,Chandigarh

If you have surplus funds,you can pre-pay a part of the home loan as it will reduce the monthly EMI burden. Quite a few banks do not charge pre-payment penalty if the loan is pre-paid partially. The definition of what constitutes partial pre-payment varies from bank to bank. This will ensure savings in pre-payment penalty and at the same time help you to save on high interest costs on a substantial portion of the loan. However,before you decide to pre-pay a home loan,it is in your interest to first pay off all unsecured dues like credit card dues and personal loans which have higher rate of interest attached to them. Also,make sure that you have some money set aside to meet emergency expenses. The impact of such prepayment on your tax liability will also have a bearing on your decision to prepay the loan.

What is a composite loan and how is it calculated? How does the bank disburse the loan? What documents are needed to avail a composite loan?

Sunil,Pune

A composite loan is a loan taken for self construction of a house. The loan is given to finance cost of land as well as cost of construction of the property. In addition to the usual documents submitted for availing a bank loan,you will have to submit an estimate of the total cost of construction,certified by an architect or a civil engineer. The cost of the plot at which you purchased or the current market value,whichever is lower,will be taken into account to work out the total cost of the project provided you commence construction within a reasonable time-frame after purchase of the plot. The loan will be released in parts,based on the progress of the construction,and after you have brought in your full contribution. Some banks are not comfortable funding self-constructed properties and hence,you will need to take that this into account while finalizing your lender. l

Expert is CEO,Apnapaisa.com
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