Fixed-rate home loans are the flavour of the season. Last week, HSBC India launched a fixed-rate home loan and loan against property product. Prior to this, Axis Bank Ltd had launched its fixed home loan in October. But unlike the Axis Bank’s rate which was fixed for the entire loan tenor, HSBC India’s fixed -rate home loan will be converted to floating rate after remaining fixed for the initial years. ICICI Bank Ltd launched a similar fixed-rate home loan in August. ICICI Bank’s loan, too, would remain fixed for one or two years and would float, thereafter.
Says Manish Sinha, head (consumer assets), HSBC India, “A large number of customers do not prepay their loan in the first few years. Keeping this in mind, we have introduced this product; wherein such a borrower can hedge against interest rate risk on loan payments.” So does this new fixed-floating home loan rate make sense for you?
Illustration by Shyamal Banerjee/Mint
The fixed rate tenor is available for one, two, three and five years. Once the fixed rate tenor you choose expires, the loan is switched to a floating rate at a margin of 200 basis points, or bps, (bank’s base rate plus 200 bps as mark-up). Currently, the bank’s base rate is 9.75%. There are two loan options available.
Maximum tenor: The maximum tenor is up to 25 years if you are a salaried customer and 20 years if you are self- employed.
Maximum amount: If you live in Delhi-National Capital Region or Mumbai or are a priority bank customer, the maximum loan amount you could borrow is Rs 10 crore. If you are from other cities, the maximum loan amount you could get is Rs 7.5 crore.
Option I: Here you will be allowed to prepay your loan, subject to certain conditions. For one, two and three years fixed tenors, the fixed rate of interest is 11.50% per annum. For the five-year tenor loan, the rate is 11.75% per annum.
Option 2: Here you will not be allowed to make prepayment during the fixed rate period. For fixed rate tenors of one, two, and three years, the fixed rate of interest is 11.25% per annum. For the five-year fixed tenor, your fixed rate of interest will be 11.50% per annum. Sinha says, “Those who do not want to prepay the loan and choose option 2 will get a discount of 25 bps on the interest rate.” In this option, you can, however, prepay after the fixed rate tenor gets over.
Prepayment charges: You can pay up to 25% of the loan amount sanctioned every fiscal year without any prepayment fee. So if your loan amount is Rs 10 lakh, you can prepay Rs 2.5 lakh in a year without paying any fee. If you prepay an amount in excess of 25% of the loan amount, you will need to pay 3% of the amount paid.
Should you go for it?
Most experts believe that in the next six-eight months, the rates will start softening. If that happens, you face the risk of getting stuck with a higher fixed rate of interest instead of benefiting from falling rates.
Says Adhil Shetty, CEO, Bankbazaar.com, “We are at the top of the interest rate cycle. You should opt for a fixed rate when rates are low, like three years back when rates were around 8-10%. Since we are at the top of the interest rate cycle, by April interest rates should start falling.”
If you want this product in any case, go for the shortest tenor in option II since you will get the loan at a cheaper rate and will escape the risk of getting stuck with it for a long period of time.
“It’s best to go for a floating rate home at this point of time,” adds Shetty. If you are keen on a fixed floating option, consider products from other lenders, including ICICI Bank and HDFC Ltd, offering similar products at competitive rates. These lenders don’t even have a prepayment penalty.