As interest rates continue to move up, there could be tough times ahead for home buyers. Interest rates today-many banks are charging over 10% for floating home loans (See Floating Rates)-are a far cry from the throwaway rates, as low as 7%, on offer just 6-7 years ago. Although, the present rates are much lower than the peak rate of 17.5% seen in 1997, they can leave a big hole in your pocket.
The recent hike in floating rates is a result of banks increasing their base rates (See Base Rates: Moving Up). As per recent Reserve Bank of India (RBI) guidelines, banks are not allowed to lend below their base rates to new customers. Since the beginning of 2010, the RBI has increased its repurchase rate, the rate at which banks borrow from the RBI, by 325 basis points (bps). "Any increase in base rates warrants an increase in lending rates," says IC Agasti, chief general manager, IDBI Bank.
Generally, floating home loan rates are 1-1.5% higher than the base rate. ICICI Bank, the largest private sector bank in the country, for instance, has pegged its base rate at 8.75% and charges around 9.75% for a standard 15-year, Rs 30 lakh loan.
IMPACT ON YOUR EMI
So, how much more do you have to shell out to keep that dream house? "Floating rates which were quoting at 8.5% as recently as August and September, 2010, are now at 10-10.25%," says Anil Kothuri, head, retail finance, Edelweiss Capital. At this rate, the EMI per lakh on a 25-year (300-month) loan that earlier worked out to Rs 805 is up 15% to Rs 926, he adds.
Younger borrowers can escape the extra financial burden by increasing the tenure of their loans but if you are someone nearing retirement, you may have to live with a higher EMI. The other option, according to Kothuri is to consider prepaying the loan if you have some surplus funds that are not going to fetch you better returns elsewhere.
You will have a definite advantage if you have borrowed from a housing finance company regulated by the National Housing Bank (NHB). The NHB, recently, scrapped prepayment charges for borrowers repaying from their own funds. "This doesn't hold for banks as they are governed by the 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 2% charge on the outstanding amount plus the amounts prepaid in the last one year, if any.
"It is always better to prepay your loan irrespective of the circumstances, if you have the funds. A 2% penalty is better than paying a 10% interest," says Gaurav Mashruwala, a certified financial planner. Kothuri, however, sees the current hike as nothing unusual. "There is at least one phase of high rates that a borrower goes through during the loan tenure of 15-20 years," he says. A switch to a fixed-rate loan, however, is not advised. This will mean an extra 2% interest and a conversion fee of about 1.5-2% on the outstanding loan amount.FLOATING Vs FIXED RATES
There are just a handful of banks that offer fixed rate loans for a period of more than 3-5 years. The few who do, generally charge very high rates. Axis Bank offers a fixed loan at 14% that is 400 bps 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 lets the borrower pay a fixed rate for the first few years, generally 3-5, 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 of such loans. State Bank of India (SBI), which began the trend recently raised its base rate to 8.25%. The bank's effective rate for loans up to Rs 30 lakhs is a card rate of 1.5% above the base rate or 9.75%. However, the bank offers a discount of 1% in the first year and 0.25% in the second and the third years. For higher loan amounts the effective card rate goes up. Earlier, SBI offered 8% in the first year and 8.5% in the two subsequent years.
Some banks and housing finance companies that offer fixed rates, limit the fixed period to 3-5 years. IDBI bank, for instance, offers a fixed-rate loan for 3 years at 11.75% and for 5 years at 12.25%, 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, he adds.
According to Agasti, the April-June period is usually rather slack for credit demand, making hardening of rates less likely. But Kothuri expects some increase since home loan rates have gone up only by 150 bps, half the general rise in rates in the system, recently, compressing the margins of housing finance companies. Rates may not have peaked yet, but could go up in the short term, he adds.
Whatever be the loan rate, the best trick in the trade still is to get a good bargain in a competitive market before finalising your loan. Even an interest discount of 0.3% will save you Rs 100,000 over a period of 20 years. It certainly is worth the effort.