Though most banks have exited dual-rate plans, average rates are quite competitive.
Just four months ago, fixed-cum-floating rate schemes were a rage. With interest rates on the rise, things have changed, but not necessarily for the worse. Though most banks have discontinued the fixed-cum-floating, or teaser, home loan schemes, major lenders such as State Bank of India (SBI) and LIC Housing Finance (LICHF) have decided to continue for a little while more.
The country’s largest bank, SBI, has changed the structure of the scheme. The lender’s Easy Home Loan comes at an interest rate of 8 per cent for the first year. The rate for second and third years is 9 per cent. Fourth year onwards, the floating rate is 1.75 per cent below the bank’s prime lending rate, State Bank Advance Rate (SBAR). From the fourth year, this rate will be 10 per cent (according to the current SBAR). In other words, the current scheme makes the product expensive by 1 per cent through the rest of the tenure.
If a person takes a home loan from SBI for a tenure of 20 years, the average interest rate, according to the new scheme, works out to 9.5 per cent. This is irrespective of the loan amount. In case of LIC’s Fix-o-Floaty scheme, the average interest charged by the lender will be 9.44 per cent (loans up to Rs 75 lakh at 8.9 per cent for the first three years).
For loans up to Rs 30 lakh, which are over 80 per cent of the housing loan portfolio of banks, HDFC offers an interest rate of 8.75 per cent. ICICI Bank offers a similar rate. SBI’s average rate over the 20-year tenure works out to 9.5 per cent.
For loans between Rs 30 lakh and Rs 50 lakh, HDFC and ICICI Bank are offering loans at 9 per cent. SBI’s interest rate remains the same (9.5 per cent). For loans over Rs 50 lakh, the gap between floating rate schemes and dual rate ones narrows to just 25 basis points.
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To put the difference in terms of equated monthly installment (EMI), let’s say a person needs Rs 50 lakh for 20 years. The initial EMI for ICICI Bank and HDFC will be Rs 44,986. For a loan from LICHF, the person will pay Rs 46,410 and, for SBI, the EMI works out to be Rs 41,822.
However, for home buyers, the first year rate should not be the most important factor. Reason: Home loans are normally for a period of 15 to 20 years. Consequently, if the rate is low in the first few years and shoots up later, home buyers are going to find themselves under serious financial strain.
A banker pointed out that a low floating rate is usually a marketing tool to attract customers. Later, the rate is aligned to their actual cost of borrowing. There is always a disparity between the rate offered to new customers and the rate existing customers pay. This is true irrespective of the bank.
About a year back, banks offered loans to new customers at 9.5 per cent. The existing customers, on the other hand, were paying 13 per cent.
The only advantage that teaser products offer is the fixed EMI in initial years. Later, they work like any other floating rate scheme.
For high-value loans – over Rs 50 lakh – the dual-rate scheme works out to be better. “It is difficult to say which one will work out better for a customer seeking a loan between Rs 30 lakh and Rs 50 lakh. For loans between Rs 30 lakh and Rs 50 lakh, the gap is around 0.50 per cent. This is significant in case of long-tenure loans. The decision should be based on whether one is willing to pay a premium of 0.50 per cent for predictability of an EMI,” said Harsh Roongta, chief executive officer, ApnaPaisa.
In case of a floating rate scheme, a borrower would get an advantage when it comes to eligibility. Lenders such as ICICI Bank and HDFC would calculate the loan amount based on 8.75 per cent interest rate. For dual-rate schemes, say SBI’s, the eligibility will be calculated on 10 per cent.
