ICICI Fixed cum Floating Rate Home Loans: How does it fare with other bank’s home loan offerings?

Last month, ICICI bank announced fixed cum floating rate home loan.  The interest rate on such loans remains fixed for one year or two years depending on the option chosen by the borrower and thereafter it shall be floating and linked to ICICI’s base rate.  Before we go into intricacies of this product, let us revisit some basics about fixed and floating rate loans.

Fixed vs. floating rate loans

In fixed rate home loans, the interest rate is fixed at the time of disbursement of the home loan and remains the same for the entire tenure of the loan.  In case of floating rate home loans, the interest rate is linked to the base rate of the bank and changes whenever the base rate is revised.  For eg:  If at the time of disbursement of loan, base rate of a bank is 9% and the floating rate home loan is priced at base rate + 100 basis points (100 basis points = 1 percent), then the interest rate for the loan shall be 10% p.a. (9% + 1%).  Later after three months, if the base rate gets revised to 9.50%, then the interest rate shall increase to 10.5% p.a. (9.50% + 1%). 

Fixed rate home loans are beneficial to the borrowers when the interest rates are projected to increase in the future.  Floating rate home loans are beneficial for the borrowers when the interest rates have peaked / nearing the peak and are projected to fall in the future.  For banks, it makes sense to disburse floating rate loans when interest rates are expected to rise and fixed rates loans when interest rates are expected to fall.  The table below depicts under which interest rate scenarios fixed and floating rate loans are beneficial to borrowers and banks.

Type of Loans	Borrowers	Banks
Fixed Rate Loans	Rates expected to rise	Rates expected to fall
Floating Rate Loans	Rates expected to fall	Rates expected to rise

As can be seen, the benefits to borrowers and banks are exactly opposite.  On the above backdrop, let us evaluate ICICI’s latest fixed cum floating rate loan offering.

ICICI’s fixed cum floating rate home loan

In this offering, the interest rate is fixed for first one year or two years depending on the option chosen by the borrower.  The interest rate for one year fixed rate loan is 10.50% p.a. for loans till Rs. 25 lacs and increases by 50 basis points for loans between Rs. 25 lacs to Rs. 75 lacs and another 50 basis points for loans above Rs. 75 lacs.  In case of two years fixed rate loan, interest rates are 25 basis points higher than the corresponding one year fixed rate loan.  After the completion of the chosen tenure, the interest rate shifts to floating rate regime and are linked to ICICI’s base rate.

ICICI’s fixed cum floating rate home loan:  Interest rate chart

Loan Amount	Fixed Rate for first 12 months	Fixed Rate for first 24 months	Floating rate from second / third year onwards*
Up to Rs. 25 lacs	10.50%	10.75%	I-Base + 0.50% (10.50%)
> Rs. 25 lacs to Rs. 75 lacs	11.00%	11.25%	I-Base + 1.00% (11.00%)
> Rs. 75 lacs	11.50%	11.75%	I-Base + 1.50% (11.50%)

* Based on current ICICI Base Rate (I-Base) of 10.00%

Source: ICICI Bank’s website

Thus, the differentiation of this offering is only for one or two years.  After that it becomes like any other bank’s floating rate home loan.

Comparison with other bank’s fixed rate and floating rate home loans

This offering is attractively priced if we compare with fixed rate home loans of other banks.  For eg:  HDFC is offering fixed rate home loan @ 12.25% p.a for loan amount till Rs. 30 lacs.  However, to be fair, this rate is fixed for the entire tenure, whereas in ICICI’s case it is fixed only for initial one or two years.  Hence we need to compare this offering with other banks’ floating rate home loans and judge how beneficial it will be for the borrowers in various interest rate scenarios.

If we look at other banks' floating rate home loans, the rates are not much different.  In case of one year fixed rate option, the rates are 25 bps lower than SBI and HDFC’s floating rate home loans for loan amount till Rs. 25 lacs. However between Rs. 25 lacs to Rs. 30 lacs, the rates are 25 bps to 50 bps higher.  Thus the benefit of ICICI’s offering depends on (a) the loan amount and (b) interest rate outlook for the next one or two years (as the case may be) to judge this offering. 

Interest Rate Outlook

RBI has been on a rate hike spree since the start of 2010 and has increase rates by 11 times since March 2010.  Though the interest rates are high at present, experts are predicting another 25 bps to 50 bps rise in rates by RBI before it takes a pause.  Thus there is a possibility of a couple of more rate hikes in next one year.  Few may also argue that the rates have reached their peak and there shall not be any further rate hike.  However, all these guesses are like shooting in the dark and it all depends on the overall global market conditions, economy, inflation and liquidity at that point of time.

Loan Amount

Here is a chart depicting benefits in case of ICICI’s offering for home loan amount of Rs. 25 lacs, Rs. 30 lacs and Rs. 35 lacs for the period of 15 years as compared to floating rate home loans offered by SBI and HDFC.  The chart illustrates the benefits based on existing interest rates and also in case interest rates increases by 25 bps or 50 bps or falls by 25 bps or 50 bps at the middle of the fixed rate tenure of one year and two years.

Benefit of ICICI Fixed cum floating rate home loan vis-à-vis SBI / HDFC Floating Rate Home Loan

Loan Amount	Fixed Rate Tenure	Interest Rate Scenario
		No change	25 bps rise	50 bps rise	25 bps fall	50 bps fall
2,500,000	1 year	6,246	9,328	12,409	3,166	86
	2 years	0	6,064	12,130	(6,062)	(12,121)
3,000,000	1 year	(7,498)	(3,801)	(103)	(11,195)	(14,891)
	2 years	(29,966)	(22,689)	(15,409)	(37,240)	(44,511)
3,500,000	1 year	0	(4,316)	8,632	(4,315)	(8,629)
	2 years	(17,486)	(8,988)	(487)	(25,982)	(34,473)

Note: Based on SBI / HDFC Floating Rates: 10.75% for loan amount till Rs. 30 lacs and 11.00% for loan amount > Rs. 30 lacs to Rs. 75 lacs

Though it is difficult to point out a clear winner, it can be seen that ICICI offering is attractive for loan amount till Rs. 25 lacs in all interest rate scenarios illustrated for fixed rate tenure of one year.  Fall of interest by more than 50 bps within a year (low probability of happening) shall make ICICI offering expensive.  Similarly, in case interest rate rises, the ICICI offering of two year fixed rate tenure is beneficial. 

Since fixed rate charged by ICICI for loan amount greater than Rs. 25 lacs is higher than the corresponding floating rate charged by HDFC / SBI, ICICI offerings becomes expensive for those who opt for loans between Rs. 25 lacs and Rs. 30 lacs.  Again for loan amount greater than Rs. 30 lacs, it depends on interest rates movement, however, the benefit is not substantial.

Thus it can be seen that the benefits varies substantially based on the loan amount chosen and expected interest rate scenario. The benefit is greatest for loan denomination till Rs. 25 lacs and for one year fixed rate tenure  The benefit keeps on reducing as the loan denomination increases.

Bachhat advises its readers to consider the benefits based on the loan amount required across various interest rate scenarios and then choose the best product.