Avoid dual-rate schemes

Floating-rate housing loans are better, as these insulate you from sudden spikes in EMIs

Though dual or fixed-cum-floating rate home loans schemes launched by a number of foreign banks are tempting, these might not be your best bet. Reason: While the rates are lower now, there could be a sudden rise in equated monthly instalments (EMIs) once the loan moves to a floating rate.

At 10.25 per cent, Citibank’s and HSBC’s home loan rates are the lowest for loans more than Rs 30-50 lakh. State Bank of India, in comparison, charges a floating rate of 10.10 per cent for loans up to Rs 30 lakh and 10.3 per cent for loans more than Rs 30 lakh. The rate for Citibank’s floating rate product is 10.75 per cent. Citibank and HSBC’s loan products would have a two-year fixed tenure, while Standard Chartered’s fixed rate of 10.26 per cent would be applicable for three years. For home loan borrowers, there would be sense of relief for the first two-three years.

“The dual-rate product is being offered for the convenience of customers. It makes sense for customers, as well as banks, to fix the rates to tackle potential volatility,” says Daryl D’souza, vice-president and business head (mortgages), Deutsche Bank India.

After the ‘fixed period’, however, for all the three banks, the rate would be 50-100 basis points above the base rate. Currently, most banks charge 50-75 basis points more than the base rate for home loan borrowers.

While there are expectations the rates might continue to rise in the near future, say two-three quarters, the question is how long would the rise continue. “In the immediate short term, interest rates might go up. But through the next one-two years, interest rates can’t be predicted. Therefore, taking a home loan with a rate fixed for a year may be better than one in which the rate is fixed for two and three years,” says Harsh Roongta of Apnapaisa.com.

The borrower, while getting the benefits of the locked rate in the first few years, insulates himself/herself from a spike in EMI. So, the EMI for a loan of Rs 50 lakh for 20 years, at 10.25 per cent, would be Rs 49,082. Of this, Rs 42, 708 would go towards the payment of interest, as banks front-load the interest payment in a home loan. But if the rate falls during the ‘fixed period’, they would be at the losing end, as their interest payout would be more.

Even after the fixed period of two years, if the bank increases the base rate by 100 basis points, the EMI would rise by Rs 3,087 to Rs 52,169. If the base rate falls, the EMI would come down. But even at 10.5-11, the new EMI would be about Rs 50,000. It this for this reason that experts feel floating rate schemes are better. Some banks may levy a part prepayment penalty of up to one per cent during the fixed period.

f course, if you seek safety from EMI volatility because of the weak economy and the insecure job market, this could help. These products also help if you want to increase the loan eligibility to an extent. At best, go for a one-year product.