Looking at HDFC’s fixed-cum-floater home loans

Last week, we carried a post on ICICI’s newly launched fixed-cum-floating rate home loans and we also compared it with HDFC and SBI’s existing floating rate home loans.  

Now earlier this week, HDFC has also introduced a fixed-cum-floating rate home loan named ‘Fixed First’.

It is interesting to notice that many banks had discontinued fixed rate home loans when interest rates started to fall in 2008 and are now encouraging borrowers to take loans with fixed rates for certain tenure citing further rise in interest rates.

In HDFC’s Fixed First, the borrower has an option to choose the fixed rate tenure between 3 years or 5 years. After the chosen period of 3 or 5 years, the loan shall be converted to regular floating rate home loan.

In ICICI’s offering, the option for fixed rate tenure was either 1 year or 2 years. Thus in Fixed First, the rates shall remain constant for longer tenure compared with ICICI’s offering.

Should one opt for fixed-cum-floating rate home loans at this point of time?

As we had noted earlier on ICICI’s offering, in fixed rate loans, the benefits to borrowers and banks are exactly opposite. It makes sense for banks to disburse more fixed rate loans when interest rates are at or are nearing peak and are projected to fall in the future.

However, borrowers benefit from fixed rate home loans if interest rates increase after they avail fixed rate loans.

Keeping this in mind, let us take into consideration the interest rate (repo) movement since the end of October 2005.

As can be seen from the interest rate chart above, we are almost nearing the peak rate in last six years. Further, the last time the interest rates peaked, it did not last long and due to occurrence of various global events at that point of time, the rates began to fall.

From the above graph, we can deduce that interest rates are reaching their peak and may not remain high for elongated period and shall fall down. Whether it shall happen immediately or after six months or one year is anybody’s guess.

However, whatever be the scenario, it does not makes much sense to tie oneself down to fixed interest rates for a long period.

The writer is a chartered accountant.He blogs at http://bachhat.blogspot.com