Should i opt for Fixed Interest Home Loan ?

Recently ICICI Bank launched Fixed Interest Home Loan at 10.25% for 10 years. It created buzz and i received multiple queries from my readers whether to opt for Fixed Interest Home Loan at 10.25% for 10 years or not. Sometime back i wrote a post on Truly Fixed Interest Rate Home Loans . Fixed Interest Home Loans cater to specific set of Borrowers who are basically risk averse. Fixed Interest Home Loan product is more suitable during uncertain economic conditions. Broadly speaking interest rate movement is basically a 10 year cycle in which interest rates move from bottom (Trough) to High (Crest) and then to bottom (Trough). ICICI Bank scheme is quite unique in terms of difference between Rate of Interest between Fixed Interest Home Loan and Floating Interest Home Loan. Difference between two is just 0.1% which is lowest till date. Traditionally the differential is atleast 1%-1.5%. Currently PNBHFL and IDBI are also providing 10 year Fixed Interest Home Loans at 10.75% i.e. differential of around 0.5% from Floating Interest Home Loan.

Before we decided whether to opt for long term Fixed Interest Home Loan or not we need to check why ICICI Bank, IDBI Bank and PNBHFL launched Fixed Interest Home Loan fixed for 10 years. ICICI Bank’s 10.25% offer is quite tempting considering floating interest rate is 10.15%. For some Home Loan lenders even floating interest rate is 10.25% or 10.50% i.e. higher than ICICI Bank’s Fixed Interest Home Loan. Lets find out

Easing Price Inflation Concerns

With the stable govt at centre, growth will be key driver to revive economy. Growth will overtake inflation concerns. International crude prices have dropped below $100 a barrel thus easing inflation concerns. Secondly, the drought concerns are now limited to certain pockets of country as monsoon is not that bad as predicted earlier by Met Department. Easing inflation concerns point to Growth driven economy thus lower interest rates.

Reversal of Interest Rate Cycle

In conjuction with easing Price Inflation concerns, aggresive launch of Fixed Interest Home Loan schemes indicates reversal of Interest Rate cycle very soon. Interest Rates will start reverse trend from Crest to Trough. Interest Rates have peaked and now bank will try to lock in as many customers at higher interest rates as they can. Reason being banks borrowed the money at high cost but with reversal of Interest Rate Cycle at some point they need to revise interest rate of existing customers on Floating Interest Rate. By locking some customers to Fixed Interest Home Loan, Bank will hedge its risk/limit loss to some extent.

Fear of Home Loan Transfer

As per RBI mandate, Bank cannot charge pre-payment penalty for Floating Interest Home Loan but this limitation is not there in Fixed Interest Home Loan. Any reversal of interest rate cycle will initiate mass exhodus of existing Home Loan borrowers if bank will not reduce interest rates of Floating Interet Home Loan for existing customers. When interest rates will decline small players will launch aggresive offers to gain market share. Fear of Home Loan Transfer will be critical concern.

Pre-Payment penalty on Fixed Interest Home Loan

For existing customers on Floating Interest Home Loan, the exit barrier is not there because of Zero pre-payment penalty. For Fixed Interest Home Loan customer the exit barrier of pre-payment penalty of 2% of outstanding principal amount is huge in terms of absolute value. Fixed Interest Home Loan customer will think 10 times before Home Loan Transfer whereas Floating Interest Home Loan customer will not give a 2nd thought if he/she gets good deal. By locking customer on Fixed Interest Home Loan, Banks will create exit barrier for customers in case of reversal of Interest Rate cycle.

Conclusion: You may opt for Fixed Interest Home Loan provided you fulfill following conditions

(a) You are a risk averse borrower

(b) You are not comfortable with financial uncertainity

(d) You are aware of pros and cons highlighted by me in post Floating vs Fixed Interest Rate Home Loans

Fixed Interest Home Loan scheme for 10 years is not provided by many lenders. Quite interestingly SBI, the leading Home Loan Provider does not offer Fixed Interest Home Loans. All the products of SBI are linked to Floating Interest rate.

Word of Caution: All conditions mentioned in this post are subject to ifs and buts. Any geo-political tension can reverse the entire trend. Geo-political tensions can increase international crude price thus inflation concerns will take driver’s seat. In this case, Interest Rates will increase and Fixed Interest Home Loan might prove to be the best decision of life.