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Home Loans & Related News

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  • Re : Home Loans & Related News

    The dilemma in home loans: fixed or floating interest rate?

    Joydeep Sen


    3d Businessman Run Ahead Of The Team Over Red Arrow. He Chose Right Path. Conceptual Isometric Better Choice Vector Illustration. In home loans, the nagging question remains: should the borrower choose fixed rates of interest or opt for floating rates?

    The decision to choose between a floating rate and fixed rate home loan has always been an important one for borrowers. This topic has been discussed widely and if you do a Google search, you will get some inputs on this. Having said that, it needs a proper perspective. First, let’s get the basics clear.

    Floating rate means that the interest rate you are paying now is a function of the rate environment today. Subsequently, as interest rates in the economy move up or down, the rate you pay will move up or down accordingly.

    Hence the name ‘floating’ i.e. it floats with some reference benchmark. A fixed rate home loan is a tricky term. While from the name it seems that the interest rate is fixed, there may be a clause in fine print that the loan provider may raise the rate at some point, triggered by some development.

    This may be referred to as the so-called fixed or floating-fixed rate home loan, where the interest rate is not as fluctuating as floating, but may fluctuate under certain conditions. Then there is the fixed rate loan, which may be referred to as proper fixed or fixed-fixed rate loan, provided you go through the document or consult a legal professional.

    From the loan provider’s point of view, who would be a bank or an NBFC, they would be more comfortable in offering a lower rate of interest in a floating rate loan, than fixed, because when interest rates move up, which will happen because the economy goes through cycles, they can increase your rate.

    In a fixed rate loan, in particular a fixed-fixed rate loan, the provider is stuck with the contracted rate of interest. Hence, in a fixed rate loan, from their own margin perspective, they would rather fix the rate on the higher side. Borrower’s perspective

    Now the big question is, from your (i.e. borrower’s) perspective, which one should you choose? If your loan is for a short tenure, say five years, floating rate is preferable as you are availing of a lower rate to start with.

    Bear in mind, interest rates may move up. Even then, since the tenure is not too long, and given that economic cycles take time to play out, it is expected that for a better part of your loan tenure, you would be paying a rate lower than the fixed one. Currently, banks are offering floating rate loans only and not showcasing fixed rate EMIs as the differential is significant.

    That is, fixed rate loans are at a much higher rate than floating rate loans and it does not make sense to offer it to customers. NBFCs on the other hand, are offering both, fixed and floating. This helps you evaluate where you would break even if interest rates were to move up.

    The flip side is, if the fixed-rate loan is so-called-fixed and not real fixed, you may be under the impression that you are buying peace of mind, by assuming EMIs would not move up, But you never know.

    Now, if your loan is for a long tenure and you start with floating rate, the interest rate cycle may reverse and you may end up paying as much as for a fixed rate loan. If that happens, you may shift to a fixed rate loan so that you know for certain what you will end up paying. Although, there would be charges/fees applicable for the switch. But if the loan amount is not too small, it is worth it. Nowadays, information is easy to access online; when the rate cycle reverses after, say, a year or two, you can track fixed rates across providers and optimise by shifting. Current situation

    A change in rules for floating rate loans were made about a year ago. The RBI circular of September 2019 stated that all new floating rate loans offered by banks from October 2019 onwards should be marked to an external benchmark.

    A pet peeve of banking loan customers, and rightfully so, used to be that banks are quick to raise loan rates when interest rates move up, but slow to reduce when rates ease. The options for a bank in using external benchmarks are the RBI repo rate or the 3-month/6-month treasury bill yield. It was also stated that the interest rate under external benchmark shall be reset at least once in three months. An external benchmark is one the fixing of which is not decided or influenced by the bank.

    For example, repo rate i.e. the rate at which RBI lends to banks for one day, is decided by the RBI, hence external. With external benchmarking, transmission of rates will be faster on both sides i.e. up and down.

    The spread maintained by banks is currently on the higher side; with the repo rate at 4% and the lowest rate being at 6.75% and most of the rates being upwards of 7%. The RBI circular stated that while banks are free to decide the spread over the external benchmark, ‘credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract.’ Banks are protecting their margin. If interest rates were to move up in future, at the same spread, the rate would be that much higher.

    Interest rate cycles will move over a long tenure, and nobody can time them.

    Rather, when rates actually move, you can compare the options between fixed and floating, subject to charges. As of now, a floating option is better as the rates are lower with one bank offering 6.75%. You are starting off with an advantage of a low rate and you are aware it may move up, instead of being under the illusion of a so-called fixed rate loan.











    The dilemma in home loans: fixed or floating interest rate? - The Hindu


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    • Re : Home Loans & Related News

      Why lenders no longer offer fixed rate home loan

      While home loan rates in India are close to two-decade low, financial institutions expect rates to have bottomed out

      Manojit Saha,

      Representative Image. Credit: iStock Photo

      With interest rates lowest in 20 years, one would think opting for a fixed rate home loan will be beneficial. The only issue is that almost no banks or housing finance companies offer fixed home loan rate products anymore.

      At present, home loan rates start from 6.7 per cent for most of the lenders. While home loan rates in India are close to two-decade low, financial institutions expect rates to have bottomed out. Going forward, rates are likely to go up if bond yields are any indication. A fixed loan rate of around 8-8.5 per cent would have been highly beneficial for a customer whose repayment schedule is 15-20 years. Home loan rates in India have hit a peak rate of over 11 per cent when the interest rate cycle was moving up.

      Home loan rate of State Bank of India (SBI) – the country’s largest lender – starts at 6.7 per cent for loan value up to Rs 75 lakh. This is the rate which will be offered to best customers according to the credit bureau score.

      Similarly, ICICI Bank also charges 6.7 per cent for loans up to Rs 75 lakh. Housing Development Finance Corporation (HDFC) charges 6.7 per cent for all loans irrespective of the loan amount. These rates are applicable till March 31 as they are part of a special discount scheme.





      None of these lenders offer fixed rate loan products. HDFC offers a fixed-cum-floating rate product where the interest rate is fixed for the initial two years.

      So why are banks and mortgage financiers not offering pure fixed rate loans.

      “They know that rates will not remain at this level. Rates will go up,” said CVR Rajendran, MD & CEO, CSB Bank.

      “If they offer a fixed rate loan they will have a loss making situation, going forward. The floating loan rates are linked to repo rate or any other rate. When RBI hikes the rate, home loan rates will go up,” Rajendran told DH.

      The Reserve Bank of India, has reduced the key policy rate or the repo rate by 250 bps since February 2019, which is at 4 per cent. While the central bank has assured the market with the accommodative stance of the monetary policy as long as necessary to revive growth, bond yields have started to harden with the yield on 10 year benchmark government bonds rising around 30 bps since the beginning of February.

      Bankers said the linking of floating rate retail loans to an external benchmark, which was mandated by RBI from October 2019 is another reason why most banks have stopped offering fixed rate home loans.

      Most banks have linked their home loan rates to the RBI’s repo rate.

      Apart from the expectation of rising interest rates, asset liability is another issue that holds back banks from offering fixed rate loans.

      “Typical tenure of bank deposit is anywhere from 1 to 3 years, at most 5 years. So there is an issue of asset liability mismatch. Which is why offering a fixed rate loan is not good economics from an ALM standpoint,” Gaurav Gupta, founder and CEO of MyLoanCare.

      In addition, there has been lower customer preference for fixed rate home loan products as lenders can charge prepayment penalty for such products.

      According to RBI norms, lenders cannot charge such penalty for floating rate retail products.

      “From a regulatory standpoint, there are repayment charges that are applicable for fixed rate products. There is very little customer preference for a fixed rate home loan for a very long time,” Gupta said.

      “From lenders’ perspective, interest rates are 18-19 years low, and home loan rates are a long tenure product. So if a bank offers a fixed rate home loan product, it will end up priced significantly higher than a floating rate loan. If floating rate loans are priced at 6.7 per cent, then chances are if someone is to have a fixed loan rate, it would be higher by 150-200 bps. Then the question is why would the customer go for it,” Gupta added.

      Home loan growth slowed down significantly in the last one year due to fall in income levels caused by the pandemic-induced lockdown.

      According to the RBI data, year-on-year loan growth of commercial banks stood at 7.7 per cent till the end of January as compared to 17.5 per cent a year ago. Loan growth in the financial year so far (till January) was 5.9 per cent as compared to 13.5 per cent a year ago.











      Why lenders no longer offer fixed rate home loan | Deccan Herald
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      • Re : Home Loans & Related News

        Home loan rate cut: Home, consumer loans from NBFCs to become cheaper


        Synopsis The average base rate of 5 largest commercial banks in India has fallen by 0.15% from 7.96% to 7.81% for the quarter ending March 31, 2021.


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        New borrowers of NBFCs and MFIs will have to pay lower interest from the first quarter of the new financial year 2021-22. Apart from new borrowers this interest rate reduction will also benefit individuals who have taken floating rate loans such as home loan from these lenders.

        RBI has released the latest average base rate which works as a benchmark interest rate for Non Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs). This rate is the average base rate of 5 largest commercial banks in India which has fallen by 0.15% from 7.96% to 7.81% for the quarter ending March 31, 2021. There has been an overall reduction of 1.4% within last 2 years as this rate was 9.21% for the quarter ending June 30, 2019.

        At the end of each quarter, the RBI releases this data which works as a benchmark for the NBFCs and MFIs to arrive at the interest rate they charge from the borrowers in the following quarter.

        Individuals who are planning to take loans from NBFCS or MFIs will get the advantage of the reduced rate of interest on all types of loans. As far as existing borrowers are concerned, only those who have taken loans on floating rate basis will get the advantage of this reduction.

        The interest rates charged by many NBFCs and MFIs on loans have traditionally been on the higher side. RBI took the decision to regulate the interest rate pricing by NBFC and MFI by providing a benchmark in the form of average base rate of the 5 largest commercial banks.

        Till March 31, 2013, all such lenders were allowed to keep a margin of 12% above their cost of funds when charging interest rates while extending loans to their borrowers. While small lenders can still charge 12% margin above their cost of funds however the bigger lenders, who have loan portfolio exceeding Rs 100 crores, cannot keep this lending margin above 10% from April 1, 2014.

        However, in addition to the above there is a cap on the interest rate that can be charged from borrowers. The maximum interest rate cannot go beyond 2.75 times of the average base rate of the 5 largest commercial banks. Therefore, this average rate is the final limit up to which interest rate can be charged.

        As the current average base rate released by RBI is 7.81% therefore the maximum rate charged by these lenders can not go above 21.48%. This is a huge relief for the borrowers who have often been paying one of the highest interest rates being charged on consumer loans.











        Home loan rate cut: Home, consumer loans from NBFCs to become cheaper - The Economic Times (indiatimes.com)
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