As interest rates continue to move up, there could be tough times ahead for home buyers. Interest rates today are a far cry from the throwaway rates, as low as seven per cent, on offer just six to seven years ago - many banks are charging over 10 per cent for floating home loans. Although the current rates are much lower than the peak rate of 17.5 per cent in 1997, they can still leave a big hole in your pocket. The recent hike in floating rates is a result of banks increasing their base rates. As per recent Reserve Bank of India guidelines, banks are not allowed to lend below their base rates to new customers.
Since the beginning of 2010, RBI has increased its repo rate, the rate at which it lends to banks, by 200 basis points. "Any increase in base rates warrants an increase in lending rates," says I.C. Agasti, Chief General Manager, IDBI Bank.
Generally, floating rates are 1.0 to 1.5 per cent higher than the base rate. ICICI Bank has pegged its base rate at 8.75 per cent and charges around 9.75 per cent for a Rs 30-lakh loan for 15 years.Impact on your EMI
So, how much more do you have to shell out? "Floating rates which were quoting at 8.5 per cent as recently as August 2010, are now at 10 to 10.25 per cent," says Anil Kothuri, head, retail finance, Edelweiss Capital. At this rate, the EMI per lakh on a 25-year loan will be Rs 926 as compared to Rs 805 in August.
Younger borrowers can escape the extra financial burden by increasing the tenure of their loans but if you are someone nearing retirement, get ready to live with a higher EMI. The other option is to consider prepaying the loan. You will have a definite advantage if you have borrowed from a housing finance company regulated by the National Housing Bank. The NHB recently scrapped prepayment charges for borrowers repaying from their own funds. "This doesn't hold for banks as they are governed by RBI," says Kothuri. Most banks do not charge a fee for part prepayment of a home loan. But on foreclosure, banks such as ICICI levy a two per cent charge on the outstanding amount plus the amount prepaid in the last one year.
"It is always better to prepay your loan. A two per cent penalty is better than paying a 10 per cent interest," says Gaurav Mashruwala, a financial planner. A switch to a fixedrate loan is not advised. This will mean an extra two per cent interest and a conversion fee of about 1.5 to 2.0 per cent on the outstanding amount.Floating vs fixed rates
There are just a handful of banks that offer fixed rate loans for a period of more than three to five years. The few which do, generally charge very high rates. Axis Bank offers a fixed loan at 14 per cent that is 400 basis points above its floating rate.
"Currently, your options are limited since banks are mainly offering floating rate loans or teaser rates," says Agasti. Teaser rates that let the borrower pay a fixed rate for the first few years, generally three or five, have been a bone of contention. After the RBI expressed concern that these could lead to greater defaults, some key banks have tweaked the conditions for such loans. The country's largest lender, State Bank of India, raised its base rate to 8.25 per cent.
The bank's effective rate for loans up to Rs 30 lakh is a card rate of 1.5 per cent above the base rate. However, the bank offers a discount of one per cent in the first year and 0.25 per cent in the second and the third years. For higher loan amounts, the effective card rate goes up. Earlier, SBI offered eight per cent in the first year and 8.5 per cent in the two subsequent years.
Some banks and housing finance companies that offer fixed rates limit the fixed period to three to five years. IDBI bank offers a fixed-rate loan for three years at 11.75 per cent and for five years at 12.25 per cent, with a reset clause. "A floating rate loan is always recommended for a period of 10 years and above, since the borrower will see one interest rate cycle in this period," says Mashruwala.
Also, the prepayment penalty is lower in a floating rate loan and it is easier to move from a floating rate loan to a fixed one since there is no lock-in. According to Agasti, the April to June period is usually slack for credit demand, making hardening of rates less likely.
But Kothuri cautions that rates may not have peaked yet, and could go up in the short term. Whatever the loan rate, the best trick in the trade is still to get a good bargain in a competitive market before finalising your loan. Even an interest discount of 0.3 per cent will save you Rs 100,000 over a period of 20 years. It is certainly worth the effort.
Courtesy: Money Today