Most banks in India offer both floating rate home loans and fixed rate home loans. Floating rate means that the interest rate on the housing loan can ‘float’ or change based on certain criteria while fixed rate means that the interest rate will not change during the entire loan term.

However, borrowers will be well advised to read the fine print of their home loan contract before signing up for a fixed rate home loan. Many banks have now added a interest rate reset clause to their fixed rate home loans allowing the banks to change the interest rates after a few years. In other words, a fixed rate home loan really does not imply that the interest rates will be fixed for the entire duration of your loan term. Your Equated Monthly Installment (EMI) that you may have budgeted for when purchasing your house with a fixed rate loan may actually go up in the future.

State Bank of India, India’s largest bank, has a reset clause which states that fixed rate home loans are subject to a interest rate reset at the end of every two years on the basis of fixed interest rates prevailing at that time. In other words, if you take the home loan today, you will have your monthly payments fixed only for the next 2 years. It’s possible that the interest rate on your loan will go up at the end of 2 years making your monthly payments higher.

United Bank of India, another public sector bank, has a similar reset clause on fixed rate home loans after every two years. Indian Bank also has a reset clause after every 2 years. There are several other banks with reset clauses on their fixed rate home loans.

Why do these banks call them fixed rate when the rates can be changed at the sole discretion of the banks after a set period? It would be better for banks to change the name of these loans to clearly reflect the adjustable nature of the interest rates. A borrower who is busy with a lot of things when purchasing a home should not have to read the fine print to figure out that their loan interest rates and monthly payments can go up after a few years.

Your fixed rate home loan contract will also typically have a force majeure clause. Force Majeure (French for “superior force”), is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term “act of God” (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. This clause again gives the right for banks to alter the rate of interest due to unforeseen or extraordinary changes in financial market conditions during the period of the loans. There is not much you can do about the force majeure clause since it’s a standard clause in most contracts.

It’s typical for banks to raise the fixed rates for new applicants when the Bank’s Prime Lending Rate (BPLR) that governs the floating rates goes up. Existing fixed rate home loan borrowers will see their interest rates go up under such circumstances at their next reset period.

It’s not clear if banks give the same priority to reducing fixed home loan interest rates when the BPLR falls. You may be stuck with your existing interest rate in such a situation. Check with your banks and read the fine print before taking a final decision on your home loan.

Comments

Leave a Reply

Name (required)

Email Address(required)

Website

Security Code: