What is PLR and how does it impact home loan interest rates?

PLR stands for prime lending rate. It is the benchmark rate of interest at which banks lend to borrowers. When the Reserve Bank of India (RBI) takes measures to control inflation or liquidity, many public and private sector banks react by raising their benchmark lending rate. This makes home, personal and vehicle loans costlier, dampening credit demand.

Why go for floating rates in these conditions?

To float or get anchored is a vital dilemma for many borrowers at this juncture. Experts point out that rates at this juncture are still high and may drop further down. Since fixed rates are a few points higher than the prevailing floating rates, it makes no sense to get anchored.

When will existing borrowers benefit?

Only a few banks have reduced the interest rates for existing borrowers. In order to entice new borrowers in this dampened climate, low rates are offered to them. So for now, existing borrowers have to wait for rates to fall substantially before the benefit reaches them. Borrowers unhappy with their lenders can consider refinancing with another lender offering better rates.

Bulk buyers will find steel and cement significantly cheaper now. This comes as good news for the construction sector

Some of the sops announced by the government, reduction in service tax, for example, promises to bring some cheer to the realty industry. There has been a cut in duty on bulk cement from 10 to eight percent. The excise duty on steel has been reduced. Also, there has been a cut in service tax rate from 12 to 10 percent in case of rent. This move, coupled with reduction in interest rates, will do the realty industry good.

The reduction in service tax will benefit those who are on rent in large commercial complexes. For example, a tenant paying Rs 10 lakhs as rent annually for an office space would have paid Rs 1.2 lakhs as service tax. Now he saves Rs 20,000 annually.

Excise duty cuts are usually passed on by companies in the form of price cuts or discounts. When the excise duty was cut last time, the steel companies passed on the benefits to their customers.

The sops will have a positive impact on people's sentiments. The duty cut can bring down the cost of construction by around 1.5 percent. This will make a significant difference to large projects.

The reduction in steel prices mean a reduction in the construction costs of a house, and lower input costs. Domestic steel makers have raised the production from the low levels of last quarter of 2008. The reduction in excise duty in the present economic condition will be beneficial. It will increase demand and give a boost to the economy. Steel companies will pass on the excise duty cut to customers.

A two percent cut is significant. After a continuous, steel is currently selling at Rs 26,500 a tonne. A two percent excise cut will mean that prices will fall by Rs 500-600, if companies pass on the full benefit.

The government's move to reduce excise duty on bulk cement from 10 to eight percent will result in a marginal drop of Rs 3-4 per 50 kg bag at the retail level. Prices for bulk buyers, like ready mix concrete (RMC) batching units, will drop significantly. The drop would be between Rs 60 and 70 a tonne for bulk buyers like construction companies and RMC units.

The reduction in excise duties on steel and cement is expected to boost the realty sector, at least to an extent. Both steel and cement constitute essential elements for construction of property. Moreover, as there has been a reduction in excise duty, there are all the more chances that the steel and cement manufacturers will pass these on to the consumers. The bulk buyers will gain in particular, because for them the savings would be enhanced because of volumes

When does EMI change?

In case of a pure fixed loan, the EMI due to the lender remains constant. In case of a floating rate loan, the EMI moves up or down depending on the bank's benchmark lending rate. When a lender increases the interest rate, either the tenure of the loan is increased (and EMI kept constant) or EMI is increased (and tenure kept constant).

Some banks offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by. In step-down loans, EMI is high initially and decreases as years roll by. Stepup option is convenient for borrowers who are in the beginning of their careers and hold a tremendous growth potential. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.

What determines EMI?

Banks arrive at EMI based on:

• Total amount borrowed,
• Tenure of the loan,
• Rate of interest and
• Computation method.

When a borrower takes a larger loan, his EMI outflow is bigger. In the current scenario of volatile rate fluctuations, it is prudent for borrowers to make as much down payment as possible. Thus, they must borrow as little as possible. EMIs are heavily tilted towards interest repayments during the initial years.

What is monthly reducing method?

Borrowers benefit more from a loan that's calculated on a monthly reducing basis than on an annual basis. In case of monthly rests, interest is computed on the outstanding principal balance for that month. The principal paid is deducted from the opening principal outstanding balance to arrive at the opening principal for the next month. In case of annual rests, principal paid is adjusted only at the end of the year. Hence, you continue to pay interest on a portion of the principal that has been paid back to the lender.

How does tenure affect cost of loan?

Longer the tenure of the loan, lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your debt clears faster. Borrowers who are in a debt trap generally increase their loan tenure. This way, their EMI burden comes down. But longer tenures can drain larger interest towards the loan and make it expensive.

What is amortisation schedule?

This is a table that gives details of the periodic principal and interest payments on a loan and the amount outstanding at any point of time. It also shows the gradual decrease of the loan balance until it reaches zero.