All you need to know about fixed interest rate home loans

[ecis2016.org] Here is all borrowers need to know about the product, before they sign up for a fixed rate home loan

Not all borrowers prefer floating interest rate home loans. This is because rates continue to change throughout the course of the loan tenure. Even though there is scope for the EMI outgo to reduce, in case of a reduction in key policy rates, the scope is equally wide for the outgo to increase, in case of an upwards tweak in the repo rate (the rate at which the Reserve Bank of India lends credit to scheduled financial institutions in the country). Home buyers who are looking for a certain degree of consistently, could opt for fixed interest rate home loans. However, they must familiarise themselves with the product, to make an informed decision. It is in this context that we discuss the key features of fixed interest rate housing loans in India.

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Interest rate in fixed rate home loans

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The certainty that a home buyer enjoys, in case of a fixed interest, comes at a cost and this additional cost has to be paid in two ways. First, fixed rate loans are always priced higher than floating interest rate loans. At India’s largest private lender HDFC, a woman borrower can currently get a housing loan worth Rs 30 lakhs at 6.95% per annum, if she applies for a floating rate. If she were to go for the fixed rate under the bank’s TruFixed loan product, she would have to pay 7.40% interest for a similar loan amount. Along with an increase in the loan amount, the interest would increase further.

The difference between the fixed and floating interest could be much wider in normal circumstances. There could be a difference of at least three to four percentage points, between the pricing of the fixed rate home loans and the floating rates. Banks have been liberal with rate reductions, because of the extraordinary circumstances caused by the Coronavirus pandemic.

Another way in which fixed loans cost a borrower more, has to do with prepayment charges.

Prepayment of fixed interest rate loans

After the RBI banned the practice, banks and housing finance companies stopped charging a penalty, in case the borrower decided to prepay the home loan. This luxury, however, was extended only to those borrowers who opted for a floating interest rate. In case of fixed rated loans, the borrower will have to pay a certain percentage of the outstanding loan, if they decide to pay the loan before the completion of the loan tenure. Typically, banks would demand 2% to 3% of the outstanding loan, as a prepayment penalty.

Penalty on changes in loan terms

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When a borrower signs up for a fixed rate housing loan, he agrees to stick to the terms and conditions mentioned in the loan agreement throughout the repayment tenure. Owing to this, penalties are levied by the banks, in case any terms and conditions are flouted by the borrower during any point of the loan tenure.

Tenure of fixed interest rate home loans

Even though the name suggests otherwise, fixed rate home loans are never fixed for the entire loan tenure. You repay the loan at a fixed rate only for a certain period, as mentioned in the loan agreement. HDFC’s TruFixed loan product, for example, offers fixed rates only for two years of the loan tenure.

After this period, banks would be free to charge a rate, depending on the prevalent rates. This becomes possible though the money-market clause that is an integral part of home loan agreements. This clause gives banks the right to tweak their spread, to keep fixed rate loans at the same level as floating interest rates.

Banks and HFCs that offer fixed rate loans

Not every bank offers home loans at fixed interest rates. In fact, some of the large private lenders do not offer fixed rate home loans at all. So, in case you are determined to get a fixed rate loan, the number of options available in the market would be limited. Moreover, as the number of lenders in this product category is limited, banks are not too willing to negotiate on their rates. Even if you have an impressive credit score, you may have to pay the standard interest. The scope for negotiation is much higher, in case of floating interest rate home loans.

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