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The flexible 2-in-1 loan

The flexible 2-in-1 loan
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First Published: Sun, Jul 27 2008. 10 38 PM IST

Updated: Sun, Jul 27 2008. 10 38 PM IST
To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A will appear every other Monday
I am a Union government employee and have booked a flat (under construction) in my name for Rs22 lakh. I have already made a down payment of Rs8 lakh, in addition to Rs4 lakh given to me as house building advance by my department. I need to avail another Rs8 lakh as home loan from a bank. Kindly advise on the process.
As a Union government employee, you could avail the option of taking a home loan on second mortgage, which is available with several banks and lending institutions.
However, a second mortgage is possible provided you have the requisite approval from your organization/department with whom the property is already mortgaged against a loan of Rs4 lakh. Once that is done, the process is similar to a normal housing loan. The amount of home loan that would be approved will depend purely on your repayment capacity.
I have taken a home loan from a leading bank wherein 50% of the loan is on fixed interest rate and the balance 50% is on variable interest rate. My EMI started from April on both the loans. Now I would like to convert the fixed rate loan into variable interest. Please advise on this.
You are referring to a 2-in-1 home loan, which gives an individual the flexibility to take part of his loan under fixed rate of interest and the other part under a floating rate of interest.
This product is designed in such a way that while the fixed rate portion of the loan helps in minimizing the risk in a rising interest rate regime—as the interest rate on this part of the loan remains constant throughout the tenure of the loan, the floating rate portion of the loan helps in getting the benefit when the interest rate falls—apart from lower interest rates, as floating rates are generally priced lower than the fixed rate.
With regard to your specific query, assuming that your fixed rate loan is at a rate much above the floating rate loan, you could convert the fixed part of the loan into floating interest rate by paying a nominal conversion fee. The advantage you have by converting is that you would pay lower interest rate as floating rates are generally priced lower than the fixed rate.
However, if you are a risk-averse person, you may want to continue the 2-in-1 loan instead of converting it fully into a floating rate loan. By doing so you will be protected at least on 50% of the loan, which will not be subject to any change throughout the loan tenure even during difficult market conditions and a rising interest rate scenario.
However, one caution you should take is to check whether your loan is at a pure fixed rate or at a fixed rate with the money market option.
Renu Sud Karnad is joint managing director, HDFC. Readers may write in with their queries and comments to askmint@livemint.com
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First Published: Sun, Jul 27 2008. 10 38 PM IST