The loan, on expiry of the fixed-rate period, switches to floating rate at a margin of 200 bps over the then base rate.
Fixed-cum-floating home loan schemes have been the flavour of this season. After HDFC and ICICI Bank, among others, HSBC India is the latest to launch a similar scheme.
The scheme offers a fixed-rate tenure for one, two, three (at 11.50 per cent) and five years (at 11.75 per cent). However, customers who are sure of not prepaying during the fixed rate period are rewarded a 25 bps rate discount and will pay 11.25 per cent and 11.50 per cent, respectively. The loan, on expiry of the fixed-rate period, will switch to a floating rate at 200 bps over the then prevailing base rate.
Why did HSBC India go for the move? "Customers assign value to the predictability we offer by allowing them to a lock-in at a fixed rate," says Manish Sinha, the bank's head (consumer). "Customers can hedge their interest rate risks over the fixed-rate tenure."
The maximum tenure under the HSBC scheme is 25 years. The 11.25 or 11.50 per cent interest is a flat rate for any sum one is eligible for. Yet, the rate seems higher when compared to the schemes of HDFC or ICICI. ICICI charges 10.50 per cent for Rs 25 lakh, while HDFC's rate is 10.75 per cent for Rs 30-lakh loan for a 20-year tenure. HDFC's scheme offers a three and five-year fixed rate, while ICICI offers a one, two, and three-year fixed rate. Even HSBC's discounted rate for those not pre-paying is only a notional benefit, given that its interest rates are higher than most fixed-cum-floating rate schemes.
According to Harsh Roongta, CEO, apnapaisa.com, the peaking of interest rates has prompted lenders to push fixed or fixed-cum-floating rate products, to lock in as many customers as possible at the existing high rates.
But experts say a reversal of the rate cycle can be expected in the next nine months to a year. So, sticking to a floating rate loan seems the best bet. “Most floating rate home loans are available at an average of 10.75 per cent,” says Vipul Patel, director, Home Loan Advisors, a mortgage advisory firm. “Even if the rates rise half a percentage point, they will be on par with what the fixed-rate loans offer."
Even if you must really look at a dual-rate loan, Patel's advice is to opt for the minimum period of one year. Reason: home loans are long-tenure loans that may go through more than two to three interest rate cycles. So it's best to avoid locking oneself with a fixed rate for such a long tenure.
Besides, customers need to consider the prepayment penalties on home loans. Typically, these penalties for fixed-rate loans are two-three per cent of the amount due. Even borrowers who have taken a fixed-cum-floating rate home loan can avail waiver of prepayment charges only after their loan moves to a floating rate, says an ICICI Bank official.
| PICKING THE RIGHT RATE | |||
| Period | HSBC* | HDFC** | ICICI ** |
| 1-year | 11.25 &11.50 | N A | 10.50,11 & 11.50 |
| 2-year | 11.25 &11.50 | NA | 10.75, 11.25 &11.75 |
| 3-year | 11.25 &11.50 | 10.75, 11.25 & 11.75 | N A |
| 5-year | 11.50 & 11.75 | 11.25, 11.50 & 11.75 | N A |
| Fixed-cum-floating rates in per cent * Flat rate for any loan amount, 11.25 is the discounted rate ** Rates vary according to loan amount | |||
Some lenders like Union Bank of India are offering a fixed-cum-floating scheme with no prepayment restriction even during the fixed period, as long as the prepayment is done from one's own source of funds.
But even with respect to prepayment options, floating-rate loans should be preferred. Housing finance companies have already done away with penalties on floating-rate loans. And, with two of the largest banks, State Bank of India and ICICI, having phased out penalties, others are likely to follow.
