New fixed-floating home loans to benefit lender than buyers

The fixed-floating loan rates are back now with difference in initial tenure and rates being tweaked to make it attractive for homeloan buyers.

ICICI Bank offers a one and two-year fixed rate option, after which rates would float with the bank’s lending rates, while HDFC offers fixed rates for three and five-year periods and LIC Housing Finance offers for five years. ICICI Bank’s rates were 10.5 -11.5 per cent and 10.75 -11.75 per cent for one and two-year fixed rate option respectively, while HDFC offered three-year fixed rates in the range of 10.75 -11.75 percent, and five-year ones in the range of 11.25 -11.75 percent, depending on the size of the loan.

LIC Housing offered fixed rates of interest for the first five years at 11.15 per cent for a loan amount of upto Rs 30 lakh, 11.40 per cent for loan of upto Rs 75 lakh and 11.65 per cent for loan above Rs 75 lakh. The smaller the loan, the lower the fixed rate. It is unclear if these loans are useful to home loan borrowers. For one, these products’ ‘fixed’ interest rates are higher than rates prevailing on floating rate loans. Secondly, lenders seem to assume that interest rates in the next five years will remain high though experts perceive that interest rates have peaked.

So from a buyer perspective, it may be a bad idea locking new homeloans with higher fixed rates for five years, as interest rates are likely to fall from here, if not immediately. It also won’t help borrowers of a fixed EMI given that they would turn ‘floating' after a certain period.

Financial advisors view that fixed rate loans offer some benefit when interest rates are expected to move upward in the medium term. Borrowers who availed teaser rates of SBI in early 2008 (in the range of 8 plus per  cent) would have benefitted from the lock-in as rates have been moving up steeply since then.

With slower GDP growth the general consensus is that we may be closer to the peak of a rising rate cycle. Experts caution that the new fixed-floating rates are not teasing enough for home loan takers.