Opt for dual rates

With banks offering special deals for the festive season, buyers should look at loans that are fixed for a longer tenure.

With the festive season on, both builders and banks are busy launching special deals and home loan packages for potential buyers.

But there is a catch. Some of the festive rates on offer are going to last only for the next six months to one year. On the contrary, there are many existing products that are on offer for a longer period.

A question that Gagan Mathur is worried about is which rate will work best for him. The recent rise in the base rates is only adding to his tension. “What if the banks increase the rate aggressively after the initial period?” wonders Mathur.

 

And, he need not be blamed. In 2003-04, many banks were lending at 7.25 per cent in the first year. Many of those borrowers are now repaying at 14 per cent plus rates.

Those planning to go for a home loan should make their decisions quickly, especially when builders are likely to give a better offer.

Rate options
For new home loan customers who opt for a floating rate, their equated monthly instalment (EMI) will reflect the change in the bank’s interest rates. Say, if a bank’s rate increases by 25 basis points from 8-8.25 per cent, for a 20-year loan of Rs 20 lakh, it will translate into a rise in EMI of Rs 852 instead of Rs 836 — an increase of Rs 16 for each EMI a lakh.

While fixed rates were a good option, the difference between fixed and floating rates has increased exponentially in the last few years. For instance, HDFC’s floating rate is at 9.25 per cent, while its fixed rate (for the entire tenure) stands at 14 per cent. Earlier, this gap stood at two-three per cent.

Banks like Punjab National Bank (PNB) offer fixed rates at 10.75 per cent. But the fine print is that there will be a reset clause whereby the rate could be changed with every rise in the interest rate. According to a State Bank of India (SBI) official, “Banks have a reset clause that allows them to revise their rates every three-five years. So, even if you opt for a fixed rate, your rate of interest can still change.”

Dual rates
Then, there are dual rates. If you prefer predictability of EMIs, at least for the first few years, opting for dual rates may work out better at present.

These products are like ballooning loans, which were quite popular earlier, where a borrower paid lower EMIs in the initial years and they went up after every three-five years. Under the dual rate scheme, banks offer a fixed rate for a certain number of years, post which the customer will pay the then existing interest rates.

At present, banks offering dual rates are Corporation Bank (7.75 per cent), SBI (8 per cent), Dena Bank (8.25 per cent), Bank of Maharashtra (8.25 per cent), HDFC (8.5 per cent) and ICICI Bank (8.5 per cent).

Once the dual rate period is over, these rates get aligned to the existing base rates.

For example, ICICI Bank’s dual rate scheme is fixed at 8.5 per cent till March 2011 and 9.5 per cent till March 2012. Thereafter, the rate will be 1.75 percent above the existing base rate. Likewise, after three years of fixed rates for SBI’s easy home loan rates, from the fourth year onwards the interest will be 3.5 per cent above the base rate and 1.75 per cent above the base rate for floating interest rates.

“Given the high demand, interest rates are likely to rise. So, it might be a good idea to opt for the dual rate being offered, as it means a lower rate for the next three years at least,” says S A R Zaidi, deputy general manager, Mumbai Circle Head, PNB.

Some banks are making their special schemes more attractive by offering concessions on documentation and processing fees, which generally cost about one per cent of the loan amount.

Financial experts feel a rise in income in the future can offset any rise in interest rates. Consequently, opting for a dual rate could be a better option now.