HDFC teases with partially fixed rate, but will home buyers bite the bullet?

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Mumabi | December 24, 2014 12:09 AM

Housing finance company HDFC has introduced a partially fixed rate scheme on home loans for tenure up to 10 years...

Housing finance company HDFC has introduced a partially fixed rate scheme on home loans for tenure up to 10 years.

The HDFC scheme offers a rate in the range of 10.15-10.50% for the initial 2-10 years after which customers would automatically switch to adjustable rate home loan (ARHL) rate between 10.50 and 11.25%.

The lender said customers applying till January 31, 2015, can avail loan under this scheme. In the case of fixed rate, the interest is fixed for the entire tenure of the loan whereas under floating rate scheme, it varies in tandem with the base rate of the lender.

Analysts believe the scheme is aimed at protecting the lender’s margins, but are not sure if it would enthuse borrowers. “At a time when the market is expecting a rate cut, customers would unlikely apply for a fixed-rate loan. Floating rates make more sense now,” said Saurabh Tripathi, a partner and director (head of financial services), Boston Consulting Group.

HDFC said it will offer a fixed rate under the two- and three-year option at 10.15% for loans up to Rs 75 lakh and will charge 660 basis points (bps) less than its retail prime lending rate (RPLR), which is 16.75% at present, after the fixed rate period.

For loans above Rs 75 lakh up to Rs 5 crore, customers will have to pay interest at 10.25% and pay 650 bps lower than RPLR after the end of the fixed tenure.

HDFC-loan

According to Ananda Bhoumik, senior director at India Ratings and Research, the scheme would help HDFC lock in some of its advances, which would remain unaffected even after the rate cut.

The HDFC fixed-rate product is similar to the teaser loan, which was  introduced by State Bank of India in February 2009. SBI had offered fixed interest rate for the first three years in the range of 8-8.5% which was then linked to its benchmark prime lending rate (BPLR) at 12.25%. Later, when other banks were aligning their lending rate benchmark to base rate in July 2010, SBI continued with its teaser loans but linked them to the base rate of 7.50%.

When the scheme was discontinued in April 2011, SBI teaser loan customers were shifted to a floating rate aligned with its base rate of 8.25%.
RBI was concerned that such schemes would affect the asset quality of the bank and had increased the standard asset provisioning from 0.4% to 2%. The central bank defines teaser loans as loans given at comparatively lower rates of interest in the first few years, after which rates are reset at higher rates.

Tripathi says the HDFC offering is unlikely to qualify as a teaser loan as the customer can avail loan at just 35 bps below the current rate, which is not as low as 425 bps lower than SBI’s BPLR (12.25) in 2009.

In September, ICICI Bank had launched a semi-fixed home loan scheme where the rate was fixed at 10.15-10.50% for the initial 2-10 years and then would be changed as per the base rate. Another private sector lender Axis Bank had launched a 20-year fixed rate home loan at 10.40%.

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