Don't get locked in fixed-rate loans for long tenures

These should be considered for a year as interest rates may start coming down after that.

Mumbai-resident Tripti Nigam has zeroed in on HDFC's three-year fixed-cum-floating-rate housing loan. Like any other borrower, she is not comfortable with the rising interest rates. So, she had been shopping for the best available rate. She read about fixed-cum-floating-rate products last month and headed to enquire about those.

Nigam had to urgently buy a house, even as this would strain her finances in the short term. As a result, she didn't want a floating-rate loan. Three years later, she will be in a better position to absorb the fluctuations of floating rates, she says.

“I will be sure about my equated monthly instalments (EMIs) for three years,” says the 26-year-old. HDFC's Fixed First offers loans of up to Rs 30 lakh at 10.75 per cent, fixed for three years. And, at 11.25 per cent, fixed for five years.

Nigam has taken a loan of Rs 25 lakh for a house in Kalyan, a Mumbai suburb. She feels that the rates will further move up to 12 per cent in the coming years. "HDFC's loan will protect me from the ups and downs of a market-linked rate," she says.

Others are also offering similar products. ICICI Bank has a one-year fixed-rate loan at 10.50 per cent for up to Rs 25 lakh. And a two-year fixed at 10.75 per cent for the same amount. Axis Bank's Nishchint, a lifetime fixed-rate housing loan has a rate of 11.75 per cent. LIC Housing Finance, too, offers a five-year fixed-rate loan, and so does IIFL.

Take the case of 27-year-old Richa Dubey, who is in talks with Axis Bank and HDFC for their floating-rate product. She had learnt about fixed-rate products from news reports, but her friends in the financial advisory business advised her against it. She was told not to get locked in a fixed-rate loan, as interest rates were likely to come down in six months to a year.

"I would rather pay a higher rate for a year than getting locked in. And the fixed rates are on a par with, if not lower than, floating rates. There is no incentive to get locked in these products," explains Dubey. For a loan of Rs 30 lakh, HDFC offers a floating rate of 10.75 per cent and Axis Bank of 11 per cent, according to data from apnapaisa.com. State Bank of India offers the same amount at 10.75 per cent.

Certified financial planner, Arnav Pandya, had earlier told Business Standard that it is best to take a one-year fixed-rate loan, as rates will take at least a year to start coming down.

An HDFC spokesperson said there was a fair amount of awareness about their fixed-cum-floating product and people were enquiring about it.

But, it could be early to gauge borrowers' response to these products, as it has been just about a month since these were launched in the market, says Harsh Roongta of apnapaisa.com. ICICI Bank launched its product on August 18, while HDFC and Axis Bank launched theirs last month. However, it might not be wise to get locked in at fixed rates for over a year, Roongta added.

"These products will gain traction because consumers believe rates will move up further. There is fear among them. And, banks are trying to play on that," says a private banker.

True. Like Nigam, Mittul Jasani has also taken a three-year fixed-rate loan at 9.50 per cent from Canara Bank. But he wasn't then aware of ICICI Bank's fixed-rate product. Similarly, Swati Jain is also not aware about fixed-rate loans. She is close to finalising a bungalow worth Rs 40 lakh in Gwalior. But she is very confused about which loan product to consider, as she has learnt that the rate may not move down in the near term. On enquiring, Jain admitted she had no idea about fixed-rate loans and found it worth considering.