In the past two years, home loan interest rates have gone up by 1.5 to 2%. Earlier, the banks stretched the loan repayment period, whereas nowadays they are increasing installment of the loan.

Rate of interest for home loan has been going up. It went up from 7.5 - 7.75% in November 2004, to 8 - 8.25% in June 2005. Again it rose by half a percent after four months. In February 2006, it became 9% and 9.25% in May 2006.

Statistics reveal that 90% of the home loan seekers choose floating rate of interest over fixed rate, mainly because a huge gap exists between fixed and floating rate of interest. Even as the repayment contract is for 20 years, customers repay home loan in 8-10 years. Both private and public banks offer loan at the same rate of interest. Last six months have seen no change in interest rates and stable international interest rates.

A person who had taken a loan to the tune of Rs 25 lakh at the interest rate of 7.5% is now paying 9%. The EMI of Rs 14,000 has now become Rs 16,000. HDFC Deputy General Manager, Subodh Salunkhe clarifies your doubts.

Q. How will EMI (equated monthly instalment) of your home loan change if you raise a loan on the fixed rate instead of floating rate?

A. Interest rate on fixed loan is 1.5 - 2 % more than the floating rate. It means that loan installment will increase by Rs 100 to Rs150 per lakh of loan.

Q. Should I raise loan on fixed or floating rate of interest?
Priyaranjan Sethi

A. It depends on your risk appetite and whether or not you want to take the risk. If you are not risk averse, it is not your cup of tear to go for floating rate of interest. It can move up and down to any extent. But if you are averse to taking risk, fixed rate is a good option. You can also split your loan between fixed and floating rate of interest and reduce risk. Many banks offer this facility and there is no fixed proportion for splitting between fixed and floating rate of interest.