To help borrowers cope with the 11 interest rate rises since March 2010, fixed-cum-floating rate housing loans are back. ICICI Bank launched a fixed rate home loan last month, followed by HDFC's Fixed First earlier this month. The latest entrant is India Infoline Investment Services' Mortgage SteadiLoan. All three say the fixed rate products would protect borrowers from rising rates over the next couple of years.
India Infoline is offering a fixed rate of interest for the first two years of the loan. ICICI Bank is offering fixed rates for one or two years and HDFC for three and five years.
India Infoline is offering a housing loan 'beginning' at 10.99 per cent for two years. This is higher than ICICI Bank's 10.75 per cent fixed for two years for up to Rs 25 lakh and HDFC's 10.75 per cent fixed for three years for up to Rs 30 lakh.
However, these are only indicative rates and can change, depending on your profile, credit history, income and so on. If you don't have a satisfying credit history or want a higher loan amount with a lower income, you can be charged a higher rate. "The difference won't be in excess of 0.5-1 per cent in most cases," says Sachin Grover, business head, mortgage loans, at India Infoline.
Still, the rates are not significantly different from existing floating rates. For instance, State Bank of India (SBI) levies 11 per cent for a Rs 30-75 lakh loan. ICICI Bank charges a floating rate of 11 per cent for loans of Rs 25-75 lakh. This is also the rate in the case of one-year fixed loans for the same amount.
At a time, when most market experts feel that the rates may not go up much, it makes more sense to opt for a floating rate loan. Certified financial planner Arnav Pandya says, "At this point, one should not get locked-in for more than a year because in six to nine months, the rates may start cooling." At the same time, good customers can always refinance their loans at a lower rate or renegotiate with their banks.
Importantly, you may be in for a surprise with SteadiLoan when the fixed rate period is over. As India Infoline does not specify the spread applicable at the end of the lock-in, Grover says it will depend on internal benchmarking, based on cost of funds. The only assurance you get is that the rate will be competitive.
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On the other hand, HDFC says it will maintain the spread between the rate levied and the prime lending rate (PLR). For instance, currently HDFC’s PLR is 16.5 per cent. But, the bank is levying 10.75 per cent for a loan of up to Rs 30 lakh, with a three-year lock-in. So, the spread applicable is 5.75 per cent below PLR. Thus, the floating rate will be 5.75 per cent less than the then prevalent PLR.
ICICI Bank says the buyer will pay at a pre-decided (at the time of sanctioning the loan) spread. For a loan of up to Rs 25 lakh, the spread will be 50 and 75 basis points more than the base rate for loans fixed for one and two years, respectively.
Be cautious while choosing this product. It gives no guarantee you will benefit by shifting from fixed to floating if rates cool two years later. All this and that interest rates may peak in a year forces financial planners to advise against SteadiLoan, which has a two-year lock-in.