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Fix-cum-Floating interest rate home loans from PSUs what does it entail?

If you just compare the average rates offered by PSUs, you may find that floating rates offered by private lenders are better. But, it is for you to take the pick.

Harsh Roongta

05 Aug 2009

Till now, the question was whether to take a fixed rate loan or a floating rate loan. Now the Public Sector lenders have changed the rules of the game by launching fixed cum floating rate loan schemes. This game plan has left many a customers baffled.

So let's understand what these schemes are all about and whether you should go in for them.



The PSU lenders now offer fixed interest rates for the first 3-5 years before converting them into the prevailing floating rate at the time of such conversion. This is a slightly different product for consumers and hence they have some difficulty in comparing it to the regular floating products of the private sector lenders.



















The table below gives details for a Rs. 30 Lac loan for 20 years.


Name of the lender

Initial Fixed Interest Rate

Floating rate

Effective Average rate assuming floating rates remain constant in all cases

Processing Fees/Prepayment Charges

State Bank of India

8% for first year and 9% for Year 2 and 3

2% below SBAR (currently 11.75%) working out to 9.75% from year 4 onwards

9.58%

Nil till September 30, 2009. No prepayment charges if paid from own sources. 2% (plus service tax) of the amount prepaid in other cases

Canara Bank

8.25% for first year and 9.25% for year 2 to 5

2.50% below Canara Bank PLR (currently 12.50%) working out to 10% - subject to a minimum of 10% from year 6 onwards

9.38% (Minimum)

Nil till December 31, 2009. No prepayment charges if paid from own sources. 2% (plus service tax) of the amount prepaid in other cases.

LIC Housing Finance

8.9% for first 3 years

2% below PLR (currently 12.25%) making it 10.25% from year 4 onwards

10.03%

1% (plus Service tax) of the loan amount. Pre-payment Charges are 2% (plus Service Tax) on the amount pre-paid

HDFC

NA

9%

9%

Processing fees is 0.50% (Plus Service Tax) of the loan amount. Pre-payment Charges are 3% (plus Service Tax) on the amount pre-paid.

ICICI

NA

9%

9%

Processing fees is 0.50% (Plus Service Tax) of the loan amount. Pre-payment Charges are 2% (plus Service Tax) on the amount pre-paid

Axis Bank

NA

9%

9%

1% (plus Service tax) of the loan amount. Pre-payment Charges are NIL



If you just compare the average rates you will find that floating rates offered by private lenders are better. Also the loan eligibility is little higher if that is a consideration for you.



However if rates rise "dramatically" in next 3-5 years then at least with PSU lenders you have the comfort of fixed interest rates for 3-5 years before being exposed to the vagaries of floating rate of interest. This is particularly relevant for the people who have normally tight budget for the first few years after they buy a home. Administratively, PSU lenders have improved substantially but private sector lenders clearly score on this front. Another factor for consideration could be administrative ease of getting the loan.



Another factor for consideration could be the public perception is that the public sector banks do not or cannot raise rates as easily as their private sector counterparts and are under pressure to reduce rates when the interest rate scenario is benign. This may or may not be true but if you are one of those who subscribe to this theory then for the above scenario or loan of Rs. 30, 00,000 for 20 years the Public sector lenders will be a better bet if:



  1. The property documents are absolutely clear and loan eligibility is not a serious issue.

And

2. You want the comfort and security of known EMIs for the first 3-5 years.



If any of these conditions is not correct then perhaps the private sector lenders remain your best bet.



You can take your own decision for the loan amount that you need and the loan tenure you require by looking at the compare quotes tables on www.apnapaisa.com which will provide both the initial rates as well as the weighted average rates. Incidentally all these banks allow these schemes for loan transfers also so this information is as valuable for people who are currently paying interest in double-digit percentages.



Hence, take your pick whether to fix cum float or just float!