EMI certainty, at a premium

EMI certainty, at a premium

Axis Bank Ltd has just added to the bouquet of new fixed loan products that have hit the market recently. However, while the earlier products have been a combination of fixed and floating rates, this one called Nishchint is offering a fixed rate for the entire tenor of the home loan.

Says Jairam Sridharan, head (consumer lending and payments), Axis Bank, “Over the last 18 months, people have seen rising equated monthly instalments (EMIs). So customers who fear uncertainty would prefer a certain (fixed) EMI."

A file photo of Rupee NotesInterest and tenor: The rate is fixed at 11.75% per annum for the entire loan tenor, which can be up to 20 years. Only 85% of the property’s value can be taken as loan for amounts up to 20 lakh; for loans above that, only 80% will be available.

Fees: The processing fee is 0.5% of the sanctioned loan amount. Unlike other home loan products from Axis Bank, where you don’t need to pay a prepayment charge, you would need to pay a prepayment penalty of 2% on the outstanding amount.

Switch: In the future, if rates fall and you want to switch to the floating rate, you can do so but at a cost of 2% on the outstanding amount. If you switch again from floating to fixed, the charge would be 0.5% of the outstanding amount.

Money market/reset clause: There is no reset clause here. This clause gives banks the option to alter the interest rate after a fixed term in case there is a change in money market conditions. Many banks include this clause in the loan agreement for fixed rate loans. Since this loan does not have this clause, this loan is really fixed for its tenor.

This product is offering one of the cheapest fixed rates in the market. While Dena Bank Ltd is also offering the same fixed rate—11.75% per annum—it has a reset clause. Most other lenders are offering between 12.25% and 14.5% per annum.

Compared with the floating rate in the same bank, it is expensive by around 100 basis points (bps). Says Jayant Pai, certified financial planner and vice-president, Parag Parikh Financial Advisory Services Ltd, “This home loan is around 200 bps cheaper than most other fixed rate loans in the market. And who knows when rates will start falling. If you are someone who does not mind paying a premium for fixed EMIs compared with floating rate home loans, go for it."

But many feel taking a fixed rate in a high interest rate regime does not make sense. Says Harsh Roongta, CEO, Apnapaisa.com, a loan portal, “We are at the peak or extremely close to the peak of the interest rate cycle. The maximum that the (key policy) rates would go up now would be by 25 basis points. So, unless you are totally lazy or totally risk averse, fixing yourself at a higher rate makes no sense."

Also, if your tenor is long, it may see a number of interest rate cycles and being in a fixed loan may not work for you. So unless you don’t mind paying a high fixed rate for the comfort of certainty of EMIs, stay away.