Why lenders no longer offer fixed rate home loans
With the lowest interest rates in 20 years, you would think that opting for a fixed rate home loan will be beneficial. The only problem is that hardly any bank or housing finance company offers fixed rate mortgage products anymore.
Right now, mortgage rates start at 6.7% for most lenders. With mortgage rates in India nearing their lowest level in two decades, financial institutions expect rates to have bottomed out. Going forward, rates are expected to rise if bond yields are any indication. A fixed loan rate of around 8 to 8.5% would have been very beneficial for a client with a repayment schedule of 15 to 20 years. Mortgage rates in India peaked over 11% as the interest rate cycle intensified.
The rate on home loans from the State Bank of India (SBI) – the country’s largest lender – starts at 6.7% for a loan value of up to Rs 75 lakh. This is the rate that will be offered to the best customers according to the score of the credit bureau.
Likewise, ICICI Bank also charges 6.7% for loans up to Rs 75 lakh. The Housing Development Finance Corporation (HDFC) charges 6.7% for all loans regardless of the loan amount. These rates are applicable until March 31 as they are part of a special reduction program.
None of these lenders offer fixed rate loan products. HDFC offers a fixed and variable rate product where the interest rate is fixed for the first two years.
So why don’t banks and lenders offer pure fixed rate loans.
“They know that the rates will not stay at this level. Rates will go up, ”said CVR Rajendran, Managing Director and CEO of CSB Bank.
“If they offer a fixed rate loan, they will be in deficit in the future. Floating borrowing rates are linked to the repo rate or any other rate. When the RBI increases the rate, mortgage rates will increase, ”said Rajendran DH.
The Reserve Bank of India has reduced the policy rate or repo rate by 250 basis points since February 2019, which is 4%. As the central bank provided the market with the accommodative stance of monetary policy for as long as needed to revive growth, bond yields began to tighten with the yield on benchmark 10-year government bonds rising. around 30bp since early February.
Bankers said linking variable rate retail loans to an external benchmark, mandated by the RBI from October 2019, is another reason most banks have stopped offering home loans. at fixed rate.
Most banks have tied their mortgage rates to the RBI repo rate.
Besides waiting for interest rates to rise, asset liabilities are another issue that prevents banks from offering fixed rate loans.
“The typical duration of a bank deposit is 1 to 3 years, at most 5 years. There is therefore an active-passive asymmetry problem. This is why offering a fixed rate loan is not a good economy from the point of view of ALM ”, Gaurav Gupta, Founder and CEO of MyLoanCare.
In addition, customer preference for fixed rate mortgage products has been reduced as lenders can charge prepayment penalties for these products.
According to RBI standards, lenders cannot charge such a penalty for variable rate retail products.
“From a regulatory point of view, redemption fees are applicable for fixed rate products. There is very little customer preference for a fixed rate home loan for a very long time, ”Gupta said.
“From a lender’s perspective, interest rates are low from 18 to 19 years and mortgage rates are a long-term product. So, if a bank offers a fixed rate home loan product, its price will end up being significantly higher than a variable rate loan. If variable rate loans are valued at 6.7%, it is likely that if someone has a fixed loan rate, it would be 150-200 basis points higher. Then the question is why the customer would opt for it, ”added Gupta.
Mortgage loan growth has slowed significantly over the past year due to declining income levels caused by the pandemic-induced foreclosure.
According to RBI data, annual growth in commercial bank lending stood at 7.7% through the end of January, down from 17.5% a year ago. Loan growth in the fiscal year so far (through January) was 5.9 percent compared to 13.5 percent a year ago.
(The writer is a senior based in Mumbai Journalist)