Fixed Rate Home Loans Are Not Really ‘Fixed’

When the RBI increases key rates, banks hike the rate at which they lend to borrowers. Hence, borrowers are burdened with increased EMI or increased tenure. Choosing fixed rate home loan is excellent for those who suspect high fluctuation in near future. As the name implies, a fixed rate loan should typically mean the interest rate will remain fixed during the entire tenure of the loan. But the fact is that fixed rate home loan is not really fixed.

Whether to choosing Fixed or Floating rate

Whether to choose a fixed rate home loan or non-fixed rate equity home loan is a classic dilemma that has perplexed home loan seekers for ages. A fixed rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule. Experts agree on the fact the fixed rate are a better option if the economic scenario promises a rise in interest rates in near future.

The non-fixed rate equity home loan or floating rate loans are at least 1%-2% cheaper than fixed interest rates. But Floating interest rate home loans are tied up to a base rate plus a floating element thereof. So, if the base rate varies the floating interest rate also varies. If the borrower choose floating rate, whenever lender hikes interest rate, borrower has to shell out extra on EMI.

Fixed rate home loan is not really fixed

Real estate experts’ state that those who suspect high fluctuation in near future should opt fixed rate Home loans. In the current rising interest scenario, your banker may also advise you to go for the same. As the name implies, a fixed rate loan should typically mean the interest rate will remain fixed during the entire tenure of the loan. But the fact is that fixed rate home loan is not really fixed.

• All the banks include the reset clause on fixed interest rate in their home purchase loan agreement papers.
• The banks also include the Force Majeure Clause. This clause allows the banks and Banks or HFC to unfix the interest rate on loan and increase it under exceptional circumstances.

Reset clause

Home loan agreement is generally viewed as a sheer formality and one always tends to ignore points that the agreement mentions. Banks have introduced the reset clause in their fixed home loan documents so that they can increase rates in case the market rates increases in the future date. Banks have introduced the reset clause in their fixed home loan documents so that they can increase rates in case the market rates increases in the future date. The Bank has right to revise the fixed rate home loan after two to five years of disbursing the loan. Effectively, this makes the fixed rate loans equivalent to floating rate ones. Reset clause on fixed rate loans is a disadvantage for the borrower as it gives the banks an escape from interest rate surges.

Force Majeure Clause

While you read your home loan agreement papers, you can spot statement like this- “Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.” This is called Force Majeure Clause that enables the lender to undertake appropriate modifications in the interest rates on home loans they sanction to their borrowers.

Experts agree on the fact the fixed rate are a better option if the economic scenario promises a rise in interest rates in near future. Fixed Rates attract higher premium compared to floating rate.

As the name implies, a fixed rate loan should typically mean the interest rate will remain fixed during the entire tenure of the loan. But the banks include the reset clause and Force Majeure clause that gives banks the power to reset the rates at their own discretion. The only benefit for borrower is that whenever there is a hike in interest rates, there will not be an immediate hike on fixed rate loans due to the two year reset clause.

Internationally, there are strong legislation ensuring that both the borrowers’ and lenders’ rights are expressed in all loan transactions. Unfortunately, in India this is not the case. Therefore, it is important that you read the agreement before committing to the terms and conditions laid down by the HFC.

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