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With Axis Bank’s new home loan, lock into 10.4 per cent for 20 years

A fixed rate home loan is generally not an interesting proposition. Banks normally charge a much higher interest rate on fixed rate loans when compared to floating rate schemes. And in the current scenario, where rates are expected to head south, it is hardly the time when you want to lock into higher rates.

Nevertheless, Axis Bank has a new ‘fixed rate home loan’, introduced last week. What is interesting about it is that it is offering comparably lower rates than the prevailing fixed rates in the market and for 20 years to boot. But at the same time, it’s not a hands-down winner.

A cheaper option

Axis Bank’s new product is a pure fixed rate home loan for a 20-year period. The loan will be offered to borrowers at a fixed rate of 10.4 per cent for the entire tenure of the loan.

When compared to existing rates available on other fixed home loans, the rates offered by Axis Bank are cheaper. Most banks and housing finance companies offer a pure fixed home loan at 11.75 per cent and above. LIC Housing Finance, for instance, charges 12.25 per cent. Axis Bank itself normally charges 11.75 per cent on fixed rate loans. The rates under this special loan scheme also compare favourably with existing floating rates. Most banks offer floating rate loans at 10.15-10.25 per cent (for loans up to ₹75 lakh).

Doesn’t fit all

This fixed loan scheme caters to the ‘Affordable Housing’ segment. The maximum loan amount offered under this scheme will be ₹50 lakh for homes in metros and ₹40 lakh in other locations. The maximum value of property is capped at ₹65 lakh in metros and ₹50 lakh in non-metros.

Second, those who are not looking to borrow immediately may get a better deal if they are willing to wait it out.

Banks can now raise funds specifically for lending to infrastructure projects and affordable housing; they can issue bonds at a lower cost thanks to some regulatory tweaks by the Reserve Bank.

Axis Bank recently raised Rs. 5705 crores of bonds at 8.85 per cent to fund infrastructure and affordable housing loans. More banks are likely to raise funds through the issue of such bonds and so, borrowers can see more attractive offers in the affordable housing segment going ahead. Third, existing borrowers of Axis Bank can switch to the new scheme, but at a cost. You need to pay 0.5 per cent of the outstanding loan amount.

Also, remember that just as in the case of other fixed home loans, this fixed home loan also charges a pre-payment penalty of 2 per cent on the loan outstanding.

Bottomline

As a thumb rule, fixed rate home loans are not a good idea at the peak of a rate cycle, like the one we see now.

This is because borrowers may lose out on better deals, when rates start to cool off.

But while it now looks as if floating rates will get cheaper in the next year or so, it is difficult to gauge the interest rate movement over a longer tenure, like 20 years.

So for borrowers who do not want to take any interest rate risk, Axis Bank’s pure fixed home loan fits the bill.