Home loan double trouble brews

A double whammy will soon be landing on those planning to take a home loan: not only will they have to contend with higher interest rates, they will also have to tackle a new beast "" the fixed loan is mutating into a semi-fixed animal, meaning, it can be yanked up after some years, based on the market trend.

According to LIC Housing Finance chief executive and director A K Dasgupta, fixed loans of the future would be fixed only for a set period.

Housing finance leader HDFC is now offering two options at differential rates, whereby it has a right to increase rates in the event of extreme volatility in market conditions, and the other at a slightly higher rate whereby the loan rate is fixed for the entire term.

Some housing finance companies have revised home loan rates by 25 to 50 basis points, while others propose a revision of 50 to 100 basis points in the coming month.

With government security yields having risen by over 50 basis points in the last three to four weeks, the cost of borrowing of housing finance companies has increased. "A hike in home loan rates is definitely on the cards," feels Dasgupta.

LIC Housing, however, has decided not to raise rates at least in the next month.

Meanwhile, HDFC has hiked the rate on fixed loans by 25 basis points to 7.75-8.5 per cent.

"In the last month or so, interest rates in the economy have been showing signs of hardening and inflation figures released last week also point to the same trend. Though we believe the rates will remain soft in the short term, the long term view is that they will rise, as reflected in the 10-year government security yields currently quoting at over 6 per cent," said an HDFC spokesperson.

Dasgupta feels the semi-fixed rate benefits the customer as the rates could come down five years later, he said.

Foreign banks have also taken the cue and some have raised their rates on floating rate home loans by 50 basis points.

Some customers who were enjoying special interest rates offered by foreign banks, have received letters stating a re-set in the terms and conditions of the home loans.

At the same time, other foreign banks feel the liquidity overhang in the system does not call for a rate hike in the immediate future.

"Perhaps an increase in rates would be called for in the next 18 months," said Vishnu Ramachandran, head consumer banking at Standard Chartered Bank.

He however, added that there is a clear change among customers to switch to fixed rate loans, though there is not a huge convergence today.

The differential in interest rates between fixed rate and floating rate loans is expected to increase from the current 50-75 basis points to at least 75-100 basis points. "Fixed rate loans means greater risk for institutions carrying these liabilities," said Dasgupta.