The Hindu Business Line : Safer home: `Float over to fixed rate'

WITH alluring home loan offers in the market, many bankers now advocate and would personally choose a fixed rate loan over a floating rate one. However, 90 per cent of the existing housing loans in India have been disbursed at floating rates with herd-like perceptions on soft interest rates to stay in the system.

For the risk-averse customer as is the average Indian one, provided he is not too greedy, it would make better sense to go for a fixed rate loan today since it's anybody's guess where interest rates are headed particularly in the wake of anticipated acceleration in demand for rupee credit and central banks round the world mulling a hike in rates.

However, the general perception on interest rates in the Indian financial world is that "there are no immediate triggers for interest rates to go down further and remote chances of a hardening even in the event of rupee credit off-take, given the tremendous liquidity in the system". "Have interest rates bottomed out," is a question most bankers evade.

The existing customers of floating-rate loans should switch over to fixed rates in the slightest hint of interest rates nudging up in India, but are customers so well informed and clued in.

"The rates in the market today are the best ever. Even a 20-year loan is available at a fixed interest rate of 8 per cent. At this rate, it makes good sense to lock into a fixed rate loan since the potential risk of interest rates going up is much higher. A war or any dramatic changes in the world economy could change the face of the global economy, interest rates and thereby domestic interest rates too in the next 20 years," said an experienced private sector banker, on being assured it was off the record. Even economists cannot make 20-year forecasts on the global economy and interest rates and therefore its best to lock into the prevailing low rates.

Very often, bankers do not advise their customers on whether to go for floating/fixed interest rates since rate movements are difficult to predict and they do not want to be caught on the wrong foot.

However, even in the event of hardening of interest rates in the country, the home loan rates will be the last affected, say bankers, hopefully giving the customer sufficient time to switch from floating to fixed rate, paying a fee. According to Mr Rajiv Sabharwal, Chief Operating Officer, ICICI Home Finance Company Ltd, "If and when interest rates go up in the Indian economy home loan rates will be the last to move up but they will eventually move up but with a lag effect."

The logic is that housing portfolios not only help banks fulfil their priority sector norms. For instance, 75 per cent of ICICI Bank's housing portfolio qualify as priority sector assets with the average ticket size being Rs 5 lakh, but also attracts less risk weight at 50 per cent as against 100 per cent applied to most other loans.

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Safer home: `Float over to fixed rate'