ICICI, HDFC and Citibank bring back fixed-rate home loans

MUMBAI: ICICI Bank has brought back fixed-rate mortgages. The bank is offering home loans up to 10 years at a fixed rate of up to 10.25%, which is close to 10.15% it charges its floating-rate customers. The move is aimed at locking into a sizeable home loan portfolio which can be funded by floating infrastructure bonds.

Market leader HDFC offers partially fixed-rate loans where rate is set at 10.25% for first two years, which is close to pricing of its floating-rate loans of 10.15%.

Citibank offers a fixed rate of 10.1% till September 2015, after which it charges a variable rate on home loan product. Among other lenders, PNB Housing also offers fixed-rate home loans at up to 10.75% to salaried borrowers.

The fixed rate tenure of home loans offered by ICICI Bank almost matches maturity of 10-year infrastructure bonds it issued on Wednesday. The bank raised around Rs 3,900 crore by selling 10-year bonds at an interest rate of 9.25%.

Last month, Reserve Bank of India (RBI) had allowed lenders to float infrastructure bonds to extent of home and infrastructure loans outstanding in their books. The infrastructure bonds are a cheap source of finance as they are exempt from reserve requirement. Incidentally, SBI, which offers home loans at 10.1%, does not have a fixed-rate option.

According to Sukanya Kumar, director of retaillending.com, a loan advisory firm, fixed-rate loans are not recommended for most borrowers because they take away flexibility of repayments. Although RBI has barred banks from seeking penalties for prepayment of floating-rate loans, they can still impose fines for early repayment of fixed-rate loans. "Interest rates are also expected to come down in future as inflation eases. We advise our clients to go for floating-rate loans," she said.

"A fixed-rate loan is ideal for someone who has limited capacity and limited resources. These borrowers are typically those who are certain that they will not prepay their loan before time and would not like to run risk of rates going up some time in future," she said.

Until recently, fixed-rate loans had almost vanished from market.

Even those who offered them had priced option almost one percentage point above floating-rate loans, discouraging borrowers.

For lenders, advantage of fixed-rate loans is that fear of a prepayment penalty reduces portfolio churn. Also for banks, demand for corporate credit and project loans is subdued, which has compelled them to look at growing their home loan book.