Makes sense to opt for fixed-cum-floating one, as rates are on an upward trend.
If you have been hesitant about a home loan, now is the time to consider one. Those attractive interest rates on home loans that teaser or dual rate schemes offer are here to stay for some more time. This means lower equated monthly instalments (EMIs) outgoings.
Improved customer response has resulted in banks extending their teaser rates. On Tuesday, HDFC extended its scheme to match State Bank of India’s (SBI) and ICICI Bank’s offer that ends on September 30. Other housing finance companies offering such rates are LIC Housing Finance and Indiabulls. Among banks, Punjab National Bank (PNB) is also offering such a scheme to its borrowers.
Opting for teaser rates
Experts say customers should opt for the current fixed-cum-floating rate loans, since interest rates will only go up from here.
“Teaser rate schemes come with a comfort that the interest rate cycle will not disturb the monthly outgo for a minimum period of a year and a half. The interest rates are on an upward trend and there is no clarity when the cycle will change,” said Harsh Roongta, CEO, Apnapaise.
Suresh Sadagopan, a certified financial planner, says teaser loans make sense for borrowers with the capacity to prepay every year and who want to finish their loan earlier than the specified tenure. This means if you get an annual bonus or commission that you can pay towards your home loan, you can look at these hybrid products.
But, they also add, the borrower should first understand the implication on finances once the lender switches the loan to a floating rate. “The change can impact your pocket, as rates can go from 9-9.5 per cent to, say, 11-11.5 per cent,” said Arnav Pandya, certified financial planner.
This is why the Reserve Bank of India has regularly expressed concern over these schemes.
The banking regulator feels these products can take a toll on borrowers’ finances once the fixed rate period gets over and customers need to pay higher prevailing floating rates.
Current Offers
According to the revised rates, HDFC will charge an interest rate of 8.5 per cent for the next six months, up to March 31, 2011. For another year (March 31, 2012), the customer will pay a fixed rate of 9.5 per cent. Thereafter, the rates will be 4.75 per cent lower than the prime lending rate, currently at 14.25 per cent. These rates are applicable irrespective of the loan amount.
For loans up to Rs 50 lakh, SBI charges eight per cent in the first year after disbursement. In the second and third year, the interest rate will be nine per cent.
Thereafter, the borrower has a choice to either opt for a floating or fixed rate. The floating rate will be 1.75 per cent above the base rate, currently at 7.5 per cent. And, a fixed rate will be 3.5 per cent above the base rate.
The interest rate structure for loans above Rs 50 lakh is the same. The only difference is that once the fixed rate tenure is over, the spreads are higher. For a floating rate, the customer will need to pay 2.25 per cent over the base rate and if he or she opts for a fixed rate, the spread will be 3.5 per cent above the base rate.
ICICI Bank offers a fixed rate of 8.25 per cent until March 31, 2011 and 9.25 per cent fixed till March 31, 2012. Thereafter, for loans up to Rs 30 lakh, the rates will be 1.5 per cent above the base rate and for loans above Rs 30 lakh, the interest would be 1.75 per cent above the base rate. Currently, ICICI Bank’s base rate is 7.5 per cent.
Comparison
Among the six schemes, experts said offers from SBI and PNB work out to be cheaper and the tenure for a fixed rate is higher, too. Both banks offer fixed rates for the initial three years of the loan. Schemes from other lenders work out to be fixed only for a year and a half. The longer duration of loan gives more safety to borrowers from a volatile interest rate environment.
If you look at the average interest rate to be paid for 20 years for loans below Rs 30 lakh, these work out to be 8.79 per cent for LIC Housing Finance, 8.98 per cent for PNB, 9.03 per cent for SBI, 9.12 per cent for Indiabulls Financial Services and ICICI, and 9.37 per cent for HDFC.
The average interest rates for loans above Rs 50 lakh for a 20-year loan work out to be the same for all lenders except PNB, which is 9.30 per cent. “Banks also fare better for now, as they have shifted to the base rate system for benchmarking their loans. This system is more transparent compared to the prime lending rate that housing finance companies follow,” said Roongta.
