Fixed home loans are pass?. Today, more and more home loan borrowers opt for floating home loan and their percentage has increased over the past few years.
Though fixed home loan rate was viable when interest rates were 7-8% in 2003 but now it has doubled to 13-14%, thanks to the fluctuating economic conditions that have resulted into further monetary tightening. This has inclined people towards floating rate wherein they see both highs and lows during the long tenure of the loan and does not end up paying higher amount throughout the entire tenure.
Punjab National Bank (PNB) executive director K Raghuraman said, ?Mainly people prefer fixed home loans when there is economic stability otherwise the choice is floating rate. Banks housing portfolio mainly consists of floating loans.? He added, ?People generally prefer to opt for floating option. Around 92% housing loan portfolio of Rs 7,665 crore as on March 31, 2008 is under floating option.?
?90% of borrowers have opted for floating loans,? said an official of LIC Housing Finance. Similar is the case with Canara Bank, which has 70% under the floating category. The reason is simple; most of the Indian commercial banks do not offer pure fixed loan rates (wherein the interest rates remain constant over the period of the loan). It is being offered with an inbuilt reset clause, which allows the banks to revise the rates after a certain period of time?PNB reviews it after 5 years whereas SBI does it at the end of 2 years.
Another reason is the fixed loan short tenure, which burden the customers with a higher equated monthly installment (EMI). For instance, public sector banks (PSBs) such as Vijaya Bank and SBI offer loans up to tenure of 10 years. ?In 2004 when interest rates were 7-8%, fixed loans were beneficial but today they have jumped to 13-14%. The number of consumers opting for floating home loan has increased. A home loan is a long-term product for 15-20 years and interest rates are unlikely to remain at higher levels for long. ?One should opt for a fixed rate loan when interest rates are lower but not now when they are substantially higher,? said Amar Pandit director of My Financial Advisor.
The picture for fixed loan takers might not be rosy as the borrowers must have seen an increase in their EMI, since it is not pure or real fixed rate. While the benefit of floating rate is that even if the floating rate goes over the fixed rate, it will be for some period of the loan and not for the entire tenure.
However, there are several loopholes in the loan system. The banks need to be more transparent as far as floating rates are concerned. Decline in the interest rates are not seen even after an overall fall in interest rates. And the customers may end up paying more.