Business

Costlier home loans

TWO LEADING home loan providers, HDFC and State Bank of India, have raised their interest rates on loans they disburse on a fixed rate basis. Such loans from HDFC will now be charged at 8.5 per cent for five years to 20 years. For SBI home loan borrowers, the band will be 8 to 9 per cent (as against 7.75 to 8.5 per cent till recently). There is no change for those who borrow loans on a floating rate basis.

As everyone familiar with home loans knows, at any given point borrowing on a floating rate basis will be considerably cheaper than taking a loan on a fixed rate basis. But the advantage of a lower cost may be deceptive.

Over a long period — housing loans are typically of a very long duration — interest rates may go up. In any case, it is too much to expect the average home owner to read interest movements even over the next few months leave alone over 5 or 6 years.

Loan providers naturally pass on the costs and the borrowers end up paying far more than they did in the initial stages of the loan. That is why fixed rate loans, by locking in the interest rates over the long period, are preferred by people who are risk-averse. They are the borrowers who would like to know with absolute certainty the quantum of the monthly instalment they will have to pay. Fixed rate loans, because they appear to be costly at the outset, have not been popular among home loan borrowers.

All major home loan providers say that only a small portion of their loans has been disbursed on a fixed rate basis. For banks there may be an additional reason. Bank deposits are typically for 3 years or less and obviously are not the best way to fund their home loan obligations. That is why in the earlier days, commercial banks set up dedicated home loan subsidiaries and raised long-term deposits to avoid any "mismatch". HDFC and other companies exclusively in the home loans business continue to offer 5 year deposits even as they diversify their liabilities portfolio and tap other sources.

Amidst a general expectation that interest rates have bottomed out and can only go up, banks are reluctant to provide "a lock-in". The first signal in that direction is the present mark up. But much earlier many banks and home loan companies were actively discouraging prospective borrowers from taking the fixed rate route.

In any case, most loan applicants in India cannot be expected to be familiar with matters such as interest rate movements.

C. R. L.

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