Most big banks have fixed rate home loan products to lock customers to higher interest rate. With the interest rate regime expected to soften, it's advisable for retail customers to stay away from such products or you may just miss out on the lower rates that may be around the corner.
Banks are expected to lower their rate of interest in the next few months. Experts advise borrowers to stick to floating rate home loans but be quick to intimate the bank you want to shift to the lower rate of interest for which the customers have to pay a switch fee. The switch fee can be as high as 2% of the remaining amount of the loan.
Which banks are offering fixed rate loans?
Axis Bank, on December 2, launched its 20-year fixed rate home loan for affordable housing at 10.4%. The bank says it is a lifetime fixed interest rate loan. The offer is valid only for a limited period and is created specifically for customers with a loan size of up to Rs 50 lakh. ICICI Bank, HDFC Bank and SBI also offer fixed rate loans.
What's wrong with the product?
"It is not advisable to lock into a fixed rate products, especially when interest rates are likely to drop. There is a big inertia among floating rate home loan customers to move down to lower rates, so many customers are paying 13-14%, simply because they have not intimated banks to shift them to the lower rates. For these kind of customers, a fixed rate home loan makes sense," says Harsh Roongta, founder of Apna Paise, a leading loan portal based in Mumbai.
What is Axis Bank's logic?
Jairam Sridharan, head, consumer lending and payments, Axis Bank, vouches for his product saying it has no riders and the interest rate is fixed for life. He told dna, "home loans are a long-duration product during which customers go through volatile interest rate cycles. By giving a lifetime fixed rate home loan, the bank is taking upon itself the interest rate risk while the customer is protected from the interest changes."
How do fixed and floating rates work?
In India, floating rate loans are actually not floating, though the RBI has been flogging banks to bring down rates for all customers. Banks offer lower rates only for new customers. Older customers continue in the old rates unless they demand they be shifted to lower rates of interest. When rates come down, the EMI in a floating rate is often kept steady and only the duration of the loan moves up and down. Fixed rate loans are also not really fixed as they have reset clauses and riders which may not protect you from interest-rate fluctuations.
What is the RBI's view?
RBI governor Raghuram Rajan said in a media interaction while unveiling the fifth bi-monthly credit policy last week, "Though rates have come down, banks have not passed it on." What he meant was that even though interest rates in government securities is below 8%, the base rate or the floor price below which banks cannot lend ranges between 9.8%-10.75%.
What about other banks?
ICICI Bank and HDFC Bank have fixed rate loan products, but have reset clauses. ICICI Bank has a fixed rate home loan at 10.25%, but it is fixed only for 10 years, after which the bank will have the right to reset the rate. HDFC Bank has a fixed rate product of 10.25% -- fixed for two years and reset later. SBI has a fixed rate of 12.5%, the highest among large banks. "But the bank is not marketing the product and there are few takers for it," said an SBI official. All banks have competitive floating rates, which may come down with fall in interest rates. For example, SBI and ICICI Bank offer the lowest interest rate at 10.1% for women customers. For general customers, the bank charges 10.15%. HDFC Bank offers the loan at 10.15%.
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