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I have a Maxgain housing loan from SBI. I have been sanctioned Rs 20 lakh loan towards the housing construction. I have utilised up to Rs15 lakh so far and am yet to take the last installment. I did not utilise moratorium period of 9 months and started my EMI from the first month of loan sanction.

Now my concern is, I want to pay not more than Rs10,000 towards EMI every month and I don't mind parking excess funds into the loan account, the feature this particular loan has.

Can you please give me a simple math around, as to how I can plan for this?

Best Regards, Saila

Here is the simple math.

Suppose floating rate home loan is available to you at an interest rate of 9 per cent for tenure of 20 years. In this case, the monthly installment works out to Rs 900. Assume your loan amount is Rs One lakh and the loan is disbursed on September 1, 2006.

In addition to your loan account, you also have a linked current account with the same bank. You can then deposit or withdraw from this current account just like any other current account. Every month when the loan installment is paid, interest at the applicable rate is calculated on the aggregate principal outstanding after taking into account the balance, if any, in the linked current account. An example will make this clear:

Assuming you deposit Rs 2,000 in cash on the 11th of September, 2006 and another Rs 5,000 in cash on the 21st of the same month and withdraw the entire Rs 7,000 on October 1, 2006. The average principal outstanding for the month of September will be Rs 97,000 calculated as given below:

Rs 1,00,000 for the first 10 days

Rs98,000 for the next 10 days and

Rs 93, 000 for the last 10 days.

The weighted average will be Rs {(1,00,000*10) + (98,000*10) + (93,000*10)}/30 = Rs 97,000}.

The interest component for thirty days in the first month out of an installment amount of Rs 900 works out to Rs 718 at the rate of 9 per cent on Rs 97,000 for 30 days. While the balance Rs 182 (Rs 900 minus interest Rs 718) will be adjusted against the principal. Compare this with the normal break up of Rs 750 towards interest and Rs 150 towards repayment of loan under the normal home loan; you can see that the principal gets paid off much quicker in this system even where the money deposited in the linked current account is subsequently withdrawn.

Every month, a similar calculation will be done. The beauty of the system is that the money you deposit in the linked current account in any month can be withdrawn freely, and it will mean that out of that month\'s installment, the interest portion will go up proportionately. In fact if you do not use the linked current account at all, the break-up of interest and principal will remain the same as a normal home loan.

The advantage of this product is that it allows you to use both your temporary and permanent cash surpluses to reduce your interest liability on your home loan and at the same time give you the flexibility of withdrawing the surpluses for other uses as and when you may require. However, these loans are normally priced higher than regular home loans.

Overseas, these kinds of loans are popularly referred to as 'offset loans' as the balance in the linked account offsets the home loan amount.

Suppose I have rented my property (for say Rs 5,000) to someone and hence my income from other sources becomes Rs 60,000 annually. I am told in that case, there is no limit to tax benefit on interest. And it can be more than Rs 1.5 lakh as well. Is it true?

Thanks, Hemant Chanchlani

Yes, if the property is bought by taking a loan and has been rented, there is no cap on the tax benefit for the interest portion of the loan, ie, it can be more than Rs 1.5 lakh. Incidentally, the income/ loss are calculated under the head 'Income from house property' and not 'Income from other sources'.

I have taken a Home Loan from Reliance Capital for Rs14 lakh in the month of May with a tenure of 240 months, interest type floating and with a rate of interest (p.a) @ 11per cent.

The EMI of the same was coming to Rs 14, 451.

In November they had sent me a letter saying that Prime Lending rate has increased and the revised rate of interest (p.a) from now on would be @ 12.75 per cent with 296 months tenure.

The revised EMI comes to Rs 15524.

My query is as below:

When the interest type is floating, should the rate of interest vary as per market conditions?

Have they increased the interest rate because the PLR has increased?

Likewise, shouldn't they decrease the rate of interest when the PLR has come down now?

Can I find a way out of this?

A.V.Vivian Kumar

The lenders link their floating rate to an internal rate. This internal rate can be called anything. Most lenders call it the Prime Lending rate, some call it floating reference rate etc.

This is an internal rate declared by the lender, the fixation of which is not at all transparent. You are right in your impression that most lenders are quick to increase this internal rate when internal rates in the market are increasing but are much slow to decrease rates when market interest rates are decreasing.

While banks may increase the EMI with increase in its benchmark rates, this does not necessarily translate into decrease in interest rates with downward movement of PLR.

Since you have taken a home loan at a floating rate of interest, it is anyways subject to change. You should explore the option of changing your home loan lender if you have maintained a good track record of repayment on the loan.

Tax calculation can change the view on pre-payment. You can also check the 'Should I transfer my loan?' calculator on Apnaloan.com to check whether it makes sense to change the lender. I bought a property in 2006 in joint name with my mom. She is also the co-applicant with me in the home loan (she is however a house-wife).

Now I am married and my wife wants to claims the tax benefits from this home loan.

I have a few questions: