Dual rate home loans are back - albeit with some minor difference. ICICI BankBSE 0.43 % set the ball rolling by launching home loans with the option of having a fixed rate for either the first year or the first two years. The fixed rate for one year is between 10.5% and 11.5%, depending on the loan amount, and for two years, it is 10.75% to 11.75%.
Last week, HDFC also unveiled products with fixed and floating rates - the plans offer fixed rates for the first three (10.75% to 11.75%) or five years (11.25% to 11.75%). LIC Housing Finance, too, has joined the game with its 'New Advantage 5' scheme. This product offers a fixed rate of interest for the first five years and on floating rate thereafter, with the interest rate being in the range of 11.15% to 11.65%.
These hybrid loan products come with a fixed rate for the first few years and then offer floating rates linked to the the bank's benchmark rate. However, they are different from the 'teaser rate' products that were launched by banks a few years ago. For one, the new hybrid loans have been launched at a time when interest rates, according to experts, have almost "peaked out". Secondly, unlike the teaser loans, the interest rates on the new loans are more or less in line with the prevailing market rates. Teaser loans typically offer artificially lower rates in the initial years of a loan.
Now, the big question: Do these products make sense?
"Some borrowers are comfortable with the concept of having a fixed commitment on their home loans. In fact, we have in the past seen borrowers going for pure fixed rates despite the rates being priced at least 100 bps higher," says Renu Sud Karnad, managing director, HDFC.
But, when interest rates are poised to fall, should you lock your loan at a higher rate? Does it make sense to pay extra for the comfort of having a fixed loan liability, that too, when you are not actually saving any money in the initial years, as the rates are mostly in line or higher (in some cases) than the current rates?
Not Teaser Products
For a loan to be classified as a "teaser rate" loan, the consumer has to pay interest rates - at least for a few months or years - that are lower than what s/he would otherwise pay on a normal loan for a similar purpose and duration.
"The new schemes do not offer any concessional rates vis-a-vis the regular floating rate loans. In fact, in the longer fixed rate options, the borrower has to pay a premium over the applicable floating rate. This is, therefore, akin to the 'fixed rate' loans being offered by a limited number of PSU (public sector) banks, who also offer fixed rates initially before charging floating rates," says Harsh Roongta, CEO, Apna Paisa.
Have the rates peaked?
That is one question you should be asking because you would gain from these loans only if the interest rates are to move up from the current levels. "It is very difficult to predict the movement of interest rates. For the past six months, many, including experts, have been talking about interest rates having reached their peak. But, the rates have, in fact, gone up by 125 basis points (100 basis points=1%)," says Karnad.