Solving the conundrum of Fixed vs Floating Home Loan Rate
Last month, several leading banks slashed the home loan rates to attract prospective home buyers. Where HDFC cut the interest rates to 10.15-10.65 per cent, ICICI Bank, another big player, announced a single rate of 10.15 per cent for all floating home loans amounting up to Rs 5 crore. Analysing the highly-competitive home loan market, country’s largest lender, SBI lowered the loan rate by 5-15 basis points, and boasted of offering the cheapest loan in the current market. Even State-owned banks jumped into the bandwagon. Oriental Bank of Commerce (OBC) also reduced the rates by 0.5 per cent, i.e., from 10.75 per cent to 10.25 per cent.
Another trend that caught the fancies of home buyers was the fixed rate home loan scheme announced by leading banks. Where ICICI Bank offered loans up to 10 years at a fixed rate of up to 10.25 per cent, HDFC offered partially fixed-rate loans at 10.25 per cent for first two years. Citibank and PNB also came up with similar schemes.
From a layman’s perspective, if we see, the deluge of deals look very attractive. Even if there is uncertainty in the market, one still gets fixed EMIs. Great, isn’t it?
So, should you opt for fixed home loan rates? Well, as per the market experts, the interest rate in our country is nearing its zenith, if not already there. Many are optimistic that in the coming years once the economy is back on track, the rates might reduce. In such a scenario, fixed interest doesn’t appear to be very attractive deal.
Explaining the same, Rajiv Raj, Co-Founder & Director – CreditVidya says, “when the interest rates are falling or expected to fall, it is prudent to go for floating rate of interest. In the current scenario banks are pushing for fixed rate of interest since it is expected that rates may fall in future. Earlier the gap between fixed and floating used to be 100 -150 basis points. Now ICICI Bank and SBI has priced aggressively their fixed rate loans with the gap only 10 basis points.”
Also, usually the fixed rate is 1-2.5 per cent higher than the floating rate. For instance, currently, ICICI Bank is offering loans at a floating rate of 10.15 per cent, while for the fixed home loan, the rate is 10.25 per cent.
Further, a closer look at the current schemes indicate that these loans might be fixed only for few years. For instance, ICICI’s offer is only for ten years, while HDFC is offering it just for first two years of the loan period. Thus, one needs to check carefully if the interest rate if “Really Fixed” or is just for few years.
“The fixed rate loans are not fixed for the entire tenor of the loan, they comes with reset after every 3 years. There is also a pre-payment charges for foreclosure of fixed loan. Thus, in the current scenario it would be beneficial for the customer to stick to floating rate of interest rather than locking themselves in fixed rate of interest for next 10 years,” adds Raj.
With these schemes doing the rounds, shifting your bank for lower home loan might have definitely crossed your mind. But is it advisable? Well, as per financial advisors and bankers, in this case, wait and watch policy is the safest bet as your lender is most likely to follow the suit.
From cumbersome paperwork to unending formalities to analysing cost-benefits, there are certain things that one needs to analyse before making a shift. If possible, one should also look out for internal switch options.
However, for those who are in the initial years of the loan, it makes sense. “It is found that home loans are interest heavy in the first 7 – 8 years of the tenor where a borrower pays the majority of the interest. Thus, it is always advisable to move to cheaper rate of interest in the initial years,” explains Raj.
However, borrowers must do a math in terms of the differential saving they would have while switching the loan by taking into consideration other charges such as Processing fees/ documentation charges etc.
Below is the table showing the current Interest Rates of few leading banks.
Compiled by CommonFloor
