Mapping interest rate movement

In a scenario of rising interest rates, having the option to choose between floating and fixed rates is bound to go down well with home loan borrowers. LIC Housing Finance’s (LICHF) latest housing loan scheme, Freedom, allows customers to make this shift within a year of loan disbursal.

While the prevailing floating rate for loans up to Rs 30 lakh is 10.15 per cent, it stands at 10.60-11 per cent for those between Rs 31-75 lakh. In a fixed-interest scenario, rates would rise by 60 basis points. The interest rate for loans up to Rs 30 lakh would clock at 10.75 per cent.

The prevailing floating rates are at a par with what other players are offering. State Bank of India (SBI), the largest public sector bank, is offering loans above Rs 30 lakh at 10.50-11 per cent. HDFC, the largest housing finance company, is offering a fixed rate of 12 per cent for those above Rs 30 lakh. Earlier, SBI’s teaser scheme — allowing lower rates for the first few years — was a hit.

Though they aren’t ready to divulge the numbers, LIC officials claim this scheme has had many takers. However, LIC’s customers choosing to get into the fixed module will have to stay put for five years. Later, the rate will automatically change to the existing floating rate.

In the recent past, we have seen 10 rate increases by the Reserve Bank of India, resulting in longer home loan tenures, and, even higher equated monthly installments (EMIs) for some. Most banks are likely to go for another increase in interest rates.

Bankers say the scheme is an indication that LIC itself expects rates to soften. And, by the time they actually fall, LICHF will have managed to block a sizable chunk of customers at higher interest rates. In the event of rates rising further, customers who choose the fixed option could pat their backs. However, if, like economists expect, the interest rate cycle starts cooling off by next year, they will be stuck paying higher rates.

However, as home loan experts say, whichever way interest rates go, this scheme allows one to balance his outgo for almost 10 years of his loan tenure. For instance, even if rates were to go down substantially over the next two years, the customer’s losses would be limited to just five years, even if he has opted for a fixed rate. This may be a good cushion for a retail customer, who is anyway indulging in speculation by betting on the possibility of future interest rate movements.