Floating rate, fixed concession

SBI’s new formula to calculate home loan rates can be confusing. Here’s some help.

The recently changed State Bank of India’s (SBI’s) formula to calculate home loan rates has stumped many. The confusion lies in the nature of the loan. As Kolkata-resident Rahul Sharma says, “I don’t know whether SBI’s rate is fixed or floating.”

Earlier, the scenario was simpler. The rate for the first year was fixed at eight per cent, followed by nine per cent in the next two years. Now, the rate is floating. But there is a concession. In other words, it is a floating rate with a fixed concession.

In numbers, it means the base rate (eight per cent) plus a spread of 150 basis points (eight per cent plus 150 basis points = 9.5 per cent) minus a concession of 100 basis points. The effective rate is 8.5 per cent in the first year. In the second and third years, the effective rate will be 9.25 per cent. But if the base rate changes, the rate could also change.

“Home loans will be extended at a floating interest rate — the card rate being 1.50 per cent above the base rate for the full term for loans up to Rs 30 lakh, and 1.75 per cent above the base rate for loans above Rs 30 lakh,” according to an SBI release.
 

WHICH RATE TO BANK ON
Banks	Period	First-year Rate (%)	Average  Rate (%)
SBI Easy Home Loan	Year 1 Year 2 & 3 Year 4 onwards	8.5 9.25 9.5	9.31
Bank of India	Initial Rate	10.75	10.25-10.75
Central Bank	Initial Rate	10	10
HDFC	Initial Rate	9.5	9.5
ICICI Bank	Initial Rate	9.5	9.5
Axis Bank	Initial Rate	9.5	9.5
LIC Housing Finance	Year 1-5	9.95	10.42
Advantage 5	Year 6 onwards	11
Source: Apnapaisa Research Bureau

Given the complexities, 30-year-old Sharma is unsure whether it makes sense to take SBI’s concessional offer. His concern: In a rising interest rate regime, the base rate could go up further. This would translate into higher payouts, maybe in the first year itself.

However, financial experts feel that despite his fears, Sharma could still opt for SBI’s Easy Home Loan. “If you look at the interest rates, SBI is offering a pretty decent rate in my view,” says Harsh Roongta, CEO, Apnapaisa.com. He reasons that even if the rate rises, SBI is likely to remain cheaper because of the concession. However, if one takes a 20-year period, the concession will only have a marginal impact.

According to a former public sector banker, SBI’s new scheme is somewhere between a teaser and a floating rate scheme. “The borrower is being lured in the initial years with low rates. At the same time, the lender has linked the interest rate to the base rate fixing the spread offered on the base rate,” he said.

Obviously, the borrower will need to check the spread applicable from the fourth year because base rate cannot be determined. When you look at the average rate of interest applicable on SBI’s scheme, it works out to be 9.31 per cent — lesser than HDFC’s and ICICI Bank’s 9.5 or Central Bank’s 10 per cent (See table).

Needless to say, any borrower will be worried about the pinch on his pocket. Keeping your monthly payouts in mind, SBI’s housing loan scheme works out best. “But your equated monthly instalments (EMIs) could rise from the fourth year because the concessions would go away. But if the interest rate scenario is favourable, one may not see a sudden spike in EMIs,” said a private sector banker.

For instance, if the base rate hovers around 8-8.5 per cent and SBI continues to charge 150 basis point as the spread above the base rate, the rate of interest in the fourth year would be 9.5-10 per cent. Given that the customer would be paying 9.25 per cent from the second year onwards (based on the existing base rate), the spike may not be a lot. However, if you are close to retirement, it would make sense to start preparing for this rise.

If you have purchased an under-construction property and are over the age of 45, it would be better if you start paying EMIs on the entire loan. “You won’t feel the financial stress suddenly when EMIs rise with increased disbursements, plus the concessions go away,” adds the banker.

Look at your repayment ability as well. Typically, homebuyers do not use the entire tenure to repay the loan. Most of them prepay it. So, if you go for such a scheme, you can use the prepayment option as well.