With the recent 25-basis-point (bps) hike in policy rates by the Reserve Bank of India (RBI), the repo rate is now at 8.25%, up from 6.75% only six months ago. An obvious impact: your loans have become costlier and your budget strained.
While existing borrowers are struggling to manage the increased equated monthly instalments (EMIs), new borrowers would have to assess how much they can afford before entering the high interest and, therefore, high EMI regime.
Perhaps a teaser loan may give them a few years’ time to work on their affordability. Though teaser loans do not exist any more, there are new products that look like them.
Three lenders—LIC Housing Finance Ltd, HDFC Ltd and ICICI Bank Ltd—have come up with loans that come with a fixed interest rate in the initial years and go floating thereafter. But are these really teaser loans and do they make sense for you? Read on to find answers to such questions.
The three products
New Advantage 5: The latest in the fixed-floating category, LIC Housing Finance launched this product earlier this month. It offers a fixed rate of interest for the first five years of the loan tenor. The floating rates applicable after the fifth year would be linked to the company’s prevailing benchmark prime lending rate.
For loans up to Rs 30 lakh, the fixed rate for five years will be 11.15% per annum. For loans above Rs 30 lakh and less than Rs 75 lakh, the fixed rate is 11.40%. Loans above Rs 75 lakh and up to Rs 1.5 crore will come at 11.65%.
Says V.K. Sharma, director and chief executive, LIC Housing Finance, “By opting for this product, borrowers need not worry about upward movement of rates for five years.”
This scheme is available till 31 December 2011 but the first disbursement should be taken by the customer on or before 15 January 2012.
Fixed First: HDFC’s product was also launched this month. Here you get two options: fixed interest for the initial three years and fixed interest rate for the initial five years.
For the three-year option, loans up to Rs 30 lakh is fixed at 10.75% per annum; loans of Rs 30.01 lakh to Rs 75 lakh will come at 11.25%; and loans above Rs 75 lakh at 11.75%. After three years, your loan will float to HDFC’s adjustable rate home loan (ARHL) product.
Under the five-year option, loans up to Rs 30 lakh is fixed at 11.25% per annum; loans of Rs 30.01 lakh to Rs 75 lakh at 11.50%; and loans above Rs 75 lakh at 11.75%. After three years, your loan will float to ARHL.
The rate of interest applicable during the ARHL period of the loan shall be linked to the lender’s PLR at the time of the loan switch to ARHL.
As per the company website, “This option is for customers seeking to lock in their home loan interest rates and not take risk on interest rates moving up in the initial years.” You need to apply for this scheme on or before 31 October, but the first disbursement on or before 30 November.
ICICI Bank’s fixed rate home loan: In this, you will get a fixed rate for one year or two years, after which the loan will move to a floating interest rate (base rate plus the mark-up of the bank).
For the one-year option, the loan is fixed at 10.50% per annum in the first year for loans less than or equal to Rs 25 lakh. If your loan is higher than Rs 25 lakh and less than or equal to Rs 75 lakh, you will need to pay 11%; and for loans aboveRs 75 lakh 11.50%. For the two-year option, the rate is 10.75% per annum for loans less than or equal to Rs 25 lakh; 11.25% for loans higher than Rs 25 lakh and less than or equal to Rs 75 lakh and 11.75% for a loan amount above Rs 75 lakh.
This scheme was launched almost a month back.
Are these teaser loans?
Many believe that loans like these are teaser loans. Let’s understand teaser loans to be able to make a fair comparison.
Teaser loans were launched a few years back, where the rate was low was fixed in the initial years and later the higher floating rate came into play. For instance, State Bank of India, which was the first to offer teaser loans, offered 8% in the first year, 9% for the next two years, and floating (linked to bank’s base rate) thereafter.
However, RBI wasn’t happy with these offerings. It was of the view that while low rates would attract customers, the high rates a few years later may not be sustainable for the same customers. The tough view led to the phasing out of teaser loans.
What distinctly sets teaser loans apart from the current offerings is the difference in fixed rates. While in teaser loans, fixed rates were lower than the prevailing floating rates, in the current offerings the fixed rates are not at a discounted price. The current products are offering fixed rates that are in the same range as that of current floating rates. At present, floating rates are around 9.99-13.5% per annum, depending on the tenor and amount; the average floating rate is 11.7%.
In fact, in some cases the fixed rates are higher than the current floating rates. Says Sharma, “According to us, it’s not a teaser loan since the initial interest rate is more than the floating rates.”
What should you do?
Loans where interest rates are fixed for initial years are designed with the intention of shielding borrowers from recurrent changes in rates.
But like all financial products, the time of entry in fixed loans makes a lot of difference. Ideally, you should take a fixed rate when rates are low, which is not the case at present. Lending rates have risen by almost 3 percentage points in the last 15 months.
Says Ranjit Dani, Nagpur-based certified financial planner, “The time to take a fixed interest rate loan, is when the interest rates are low. Today, home loan interest rates are at the peak of the interest rate cycle. Locking rates at high interest rates, that too at the peak of the interest rate cycle accordingly to me is stupidity. Even if interest rates rise, it will be a maximum of 50 bps. After that the economy will start suffocating and interest rates are bound to fall.”
While it is difficult to predict exactly when interest rates will start falling, most experts believe that rates will start softening in the next two-three quarters. Says Vaibhav Agarwal, banking analyst and vice-president (research), Angel Broking Pvt. Ltd, “Interest rates are close to peak levels. There is no point in freezing loans at such high levels. If not in the next three to six months, in the next six to nine months, rates should be moving downwards.”
This means there is risk in locking your loan at a high rate. If rates fall, which experts predict will, you will be at a disadvantage. But if you want a fixed cash outflow for a defined period, opt for one or two years. You may not want to take the risk of locking your loan with high rates for three to five years.