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Banks won't let you shuffle home loan rates
May 15, 2007: Banks are inserting
new clauses in home loan agreements to protect
their books amid hardening interest rates and
rising defaults. These loan conditions will make
life a little more difficult for borrowers who
are struggling to pay higher EMIs.
Some banks have stopped giving fixed rate loans
beyond a few years, a few have set an early reset
clause whils others are insisting on a lock-in
period during which a switch from fixed to floating
rates (and the other way round) isn’t possible.
Borrowers who have taken home loans on floating
rate have already seen it increase by three to
four percentage points in the past 18 months to
around 11.5-12%. With rising rates, new borrowers
are looking at taking fixed rate loans, while
the existing borrowers are thinking of a switch
from floating to fixed rate loans despite a higher
rate. However, banks are designing loan documents
to discourage this.
A fixed rate loan is aimed at protecting the
borrower against the risk of rising interest rates.
But a reset clause will enable banks to charge
a higher rate at the time of reset (if interest
rates moves up). Government-owned IDBI Bank and
Union Bank do not provide fixed rate loans above
five years. ”The fixed and floating rate
concept is slowly losing its relevance. Over the
past two occasions, we have not raised interest
rates for existing floating rate customers, which
means loans have been at a fixed rate of interest
for them even as interest rates have moved up
in the system,” said MV Nair, Union Bank
of India chairman.
A number of other banks are offering a long-tenure
fixed-rate option, but with a reset clause. Last
month, Bank of India reduced its reset option
on fixed rate home loans from 10 years to five
years. Justifying the move to reduce the reset
clause, D Krishnamurthy, general manager in charge
of retail at Bank of India, said, “In such
a volatile interest rate scenario it is not advisable
for the customer and the bank to go for a fixed
rate for a long time.”
The country’s largest bank — State
Bank of India — with a home loan portfolio
of almost Rs 38,000 crore, which is 13% of its
total credit, has a reset clause at the end of
two years. Canara Bank and Punjab National Bank
have a reset option on fixed rate home loan at
the end of five years; it is three years in the
case of Allahabad bank. PNB has recently inserted
a lock-in clause in loan documents, wherein a
customer cannot switch from floating to fixed
and fixed to floating within three years of taking
a home loan. “The move follows a requests
from a number of big-ticket borrowers who were
looking a switching loans from floating to fixed
rate due to rise in interest rates.
Source: The Economic Times
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