Shut the door on fixed-rate loan option

Experts feel interest rates may reverse soon. So, borrowers are better off with floating-rate home loans.

In the past two month, many lenders like ICICI Bank, HDFC, India Infoline Investment Services and LIC Housing Finance have launched fixed-cum-floating-rate housing loans. Axis Bank, on the other hand, has surprised many with its latest offering, Nishchint. This is a lifetime fixed-interest home loan. The third-largest private sector bank is offering a rate of 11.75 per cent, fixed for up to 20 years.

At a time when the Reserve Bank of India (RBI) has already raised the key policy rates 11 times since March 2010, most fixed-rate lenders feel their products will protect the borrowers from rising rates. Axis Bank is no different. "Due to rising interest rates, customers are uncertain about equated monthly instalments (EMIs) on home loans. We want to offer certainty to such customers," says Jairam Sridharan, senior vice-president and head (consumer lending and payments). He adds that this product is only for risk-averse borrowers.
 

HOW THEY STACK UP
	Axis Bank	HDFC	ICICI Bank
Interest Rate (%)	11.75	12.25	14.50
Switching  charge (%)	2 (of loan amount)	0.5-1.5	1.75% (on principal outstanding)
Prepayment  charges (%)	2 (of the  outstanding)	2 (if not  prepaid from own source)	2 (of the outstanding, for full prepayment)
Source: www.apnapaisa.com

Besides Axis Bank, HDFC and ICICI Bank also offer similar products. According to Apnapaisa.com, at 12.25 per cent (for up to Rs 30 lakh) and 14.5 per cent, respectively, for a 20-year loan, the rates charged are higher than Axis Bank's.

Some public sector banks like Punjab National Bank (PNB), Indian Bank and Corporation Bank also offer fixed- rate home loans. These banks also charge between 12.25 per cent and 14 per cent. But, here the rates are reset every three to five years, depending on the spread agreed upon. For instance, after every five years, the rate could be reset to say 50 basis points or 0.5 per cent above the then floating rate, fixed thereafter for the next three or five years, as the case may be. However, these banks are not pushing these products aggressively. B A Prabhakar, executive director, Bank of India, says: "We do offer this product but are not very keen on pushing it, as there is an interest rate risk for us in long-term products like these. And, we don't want to build a huge portfolio in this space." High interest rate risk to bank here implies losing out if the rates rise, as customers will be locked in at a lower fixed rate.

While, the rate charged by Axis Bank (among existing players) is the lowest, it is still higher than the existing floating rates. For instance, State Bank of India (SBI) charges 11 per cent for a Rs 30-75 lakh floating-rate loan.

While Axis Bank is charging higher than the fixed-cum-floating rate products, HDFC is charging 11.25 per cent for a Rs 30-75 lakh loan, fixed for the initial three years, thereafter changing in line with the applicable floating rate.

Experts say, typically, when banks start pushing fixed or fixed-cum-floating rate products in a rising rate regime, it can be loosely interpreted as a signal for reversal of the rate cycle. Possibly, because banks are trying to lock in as many customers as possible at high rates.

Certified financial planner, Gaurav Mashruwala, says: "If you are planning to take a loan for a period of more than seven years, which is mostly the case for home loans, it is always advisable to opt for the floating interest-rate loans." Reason: Over this period, you are most likely to go through at least two-three rate cycles and getting fixed at a rate may not always be beneficial.

Many point out that LIC Housing Finance's five-year fixed-rate product benefited many who went for it a year or two back, as the rates were starting to rise. And, when rates fall to pre-2008 levels, these borrowers will move to floating rate. However, most borrowers will not be able to time the interest rate cycle so effectively.

Harsh Roongta, CEO, apnapaisa.com, says: "Home loans tend to be prepaid or repaid ahead of time." Therefore, prepayment penalties, if any, should also be factored in. In case of Axis Bank, a prepayment penalty of two per cent of the outstanding amount is charged. Usually, if the loan is prepaid from own funds, this charge is waived off. However, here the charge is applicable irrespective of the source of funds. ICICI Bank levies two per cent for full prepayment and HDFC charges two per cent of prepayment amount if the payment is not from own funds.

Another charge that one must be aware of is the switching charge, levied if moving from a fixed to a floating-rate product or vice versa. For instance, if you shift from Nishchint to a floating-rate loan, you will be charged two per cent of the loan amount. But, if you are shifting from a floating rate to Nishchint, the charge is 0.5 per cent of the loan amount or Rs 5,000, whichever is higher.