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ICICI Bank’s bold move to introduce a fixed rate home loan of 10 years at 10.25 per cent might not find many followers, since interest rates are expected to fall from next year, say bankers.
“Banks generally push the fixed interest rate option when they expect rates to fall. The idea is to try and get more consumers locked in at the current rates before these start declining. The general consensus is that rates might start falling from the next calendar year onwards. As a result, it is unlikely that we are going to see several consumers opting for such products,” said a public sector banker.
State Bank of India used to have a fixed rate home loan earlier but it did not find too many takers, said B Sreeram, managing director, National Banking Group. Although it was fixed, it had a re-set clause every three years.
Smaller banks might feel the pressure and introduce a similar product. Federal Bank and ING Vysya are watching and might also reduce the difference between the floating and the fixed rate of interest on home loans. YES Bank is also likely to introduce a fixed rate loan, said a person familiar with the development.
ICICI Bank’s fixed rate loan will reduce the difference between the fixed and floating rate to a bare minimum of 10 basis points. It is offering a fixed rate home loan for 10 years, at 10.25-10.45 per cent, for amounts up to Rs 1.5 crore. As against this, the bank charges 10.15 per cent on floating rate loans of up to Rs 75 lakh. PNB Housing Finance and Housing Development Finance Corporation offer similar products. However, HDFC offers s fixed rate only for two years, at 10.25 per cent, and a floating one after that. It charges 10.15 per cent for its floating rate loan
Typically, customers want fixed products when they perceive interest rates will rise and will opt for a floating one when there is a downward bias. "From the point of view of retail customers, it is not a popular product. When interest rates start coming down, it is difficult to explain to retail customers why their rates do not change. They don't understand the implications of a fixed rate loan,'' a banker says.
Another official with a private sector bank says fixed interest rates coming into the market are an extension of the festival season offers. “During the season, banks introduce variants of existing products to catch customers’ attention. A fixed rate interest loan is another such scheme,” he said.
Financial advisors also caution against a fixed rate home loan. It is advisable only for someone taking a home loan for a short period, say seven to 10 years. That usually happens when you are in your late 40s or 50s and not far from retirement, said Vipul Patel, founder of Mortgage World, a home and mortgage loan advisory. Most home loans that are sanctioned are for 15 years and above, going up to 25 or 30 years. The advantage of a longer-term home loan is a lower monthly outgo. You can also avail of a bigger loan. Another disadvantage of a fixed rate home loan is that lenders will charge a penalty if you choose to prepay, which is not the case with floating rate loans, Patel added.
