Time to lock into fixed-rate home loans?

The US mortgage market has seen a seven basis point rise in interest rate recently. In fact, rates have been on the rise for some time in the sector.

And the US Federal Reserve chairman Alan Greenspan on Wednesday stoked global fears that interest rates will soon rise. Global markets rattled as he said the threat of deflation is no longer an issue and that US banks are well positioned for higher rates.

The position in the Indian market is likely to mirror the global scene, albeit with a time lag. Bond yields in the domestic market also rose following Greenspan's statement.

It's pertinent to also note that Bank of England and the Bank of Australia were among the first to increase interest rates by 25 to 50 basis points.

So how does all this 'interest' the common man?

Well, considering the fact that global rates are clearly on the rise and Indian financial bodies tend to tap overseas borrowings to fund their domestic businesses, this clearly could see interest rates in India moving up.

Home owners have all along been experiencing lowering of interest rates on home loans, it is time for them to keenly look at locking in their home loans at fixed rate of interest. Else, they might end up being caught on the wrong footing when interest rates suddenly move up.

As it is, a host of banks are saying no to fixed rate home loans beyond five years. This is in fear of a possible asset-liability mismatch. Many foreign banks have never even offered a fixed loan product as unlike the housing finance companies, they do not have access to long-term funds and are mostly reliant on savings and current accounts as well as time deposits.

Considering that interest rates today are at their all time low, it would be wise on the part of home loan borrowers to switch to fixed loan products and lock in at the current low rates.

"There is no point expecting rates to fall any further. They have actually stabilised at current levels and it is all a question of one's ability to negotiate the best deal on a personal basis," said a senior banker.

It might also be a good idea to look into Housing Development Finance Corporation's (HDFC) combo-loan product. This allows a borrower to take a view on interest rates and accordingly decide how much of the loan he wishes to take on a floating rate basis and what percentage on a fixed rate basis.

According to senior officials, most customers still expect rates to fall. This explains why the 70:30 ratio on combo loans, favouring the floating rate product.

At the same time, it may be wise on borrowers' part to ensure that the financing institution is willing to offer a fixed rate product. Today some customers are facing a chicken and an egg situation.

While many have been advised to lock-in long-term loans at the current fixed rates of interest "" as rates are seen to have bottomed out "" banks are not willing to lend at fixed rates of interest.

Some of the private sector banks have refused customers fixed-rate loans beyond five years, fearing firming up of rates in the medium term.

"We are rejecting applications of customers asking for fixed rate loans beyond five years as we cannot reprice assets (fixed rate home loans in this case) even as our borrowings are repriced," said the head of retail assets at a new generation private sector bank. Some of the large public sector banks are equally averse to giving loans beyond 10 years.

This is because banks want to protect their balance sheet against any asset-liability mismatch.

"We do not wish to get stuck to low interest rates considering that the economic conditions are in a state of flux," said an SBI official.

In effect, it is all a question of funding mix. Banks' funds are primarily short-term in nature. In contrast, housing financial institutions such as HDFC have long-term funding through retail term deposits of up to seven years, bonds of up to 10 years, international funding of even 20 years and beyond, as well as domestic term loans from institutions of 10 years tenor.

This enables housing finance companies to continue to offer fixed rate loans, while some of their bank counterparts have shown aversion to offer the product.