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-Ã -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.
