This article is a sample case study stressing on the fact that one should look beyond introductory offers to arrive at the actual total loan cost to truly compare various home loan offers from banks. One also needs to consider, will there be better or more expensive offers after a while on both the property prices and home loan interest rates that you can either gain from or lose out on by taking up this offer? These and more questions that may arise need to be given thought, apart from total loan cost before you consider taking up such loan offers.
The current hot trend in the home loans segment is the fixed cum floating interest rate schemes crowding the loan marketplace. The magical 8% home loan scheme that first came into being sometime in the beginning of this year has created quite a stir in this segment and quickly became a sort of benchmark to promote discounted festive loan offers even below this rate for the first six months to a few years of the loan tenure by various banks. After this time period, it reverts to the prevailing floating home loan rate in the market.
Let us consider the factors involved in this type of interest rate scheme and its implications.
First time home buyers will be tempted to buy a house right now as the property prices have also dipped and the market is in recovery stages now. In an effort to revive the realty market and the lending market which had seen a slump in the not so recent past, such loan offers could seem the ideal bet.
However, as a loan applicant you need to evaluate if it makes sense for the home buyer to opt for these fixed cum floating rate loan offers. Also, should existing home loan borrowers shift to this apparently attractive loan rate scheme? To understand how relevant it is for a new home loan customer and an existing home loan borrower who wishes to transfer his home loan to another bank offering a fixed cum floating interest rate scheme, let us first consider the significance of the savings from these offers over time. Is the offer indeed attractive like it appears upfront?
Let us consider an example to understand this better. Banks will provide an amortization table, which will help you calculate the costs involved. Please note interest rate projections in the calculation are just an indication and may not be what it translates to in reality – could be less or more.
A fixed cum floating rate loan offer: Rs.30 L for 20 years at 8% interest rate frozen for the first year and then follows a floating home loan rate of 10.25%.
For the first year at a frozen rate of 8% the money outflow on the loan : Rs.3L
After one year when the interest rate is changed to the current floating rate of 10.25% : Rs. 66.8 L
Total money outflow over 20 yrs + Processing fee Nil =Rs. 69.8 L
Total Interest paid out for the loan – 39.8 L
An existing floating loan offer : Interest rate of 9.75% for the same loan amount of Rs.30 L and tenure of 20 yrs and a processing fee of 1% of the loan amount, which is Rs. 30,000.
Total money outflow over 20 yrs =68.3 L + 1% processing fee (Rs.30,000) =68.6 L
Total interest paid out for the loan =38.3 L
So opting for a pure floating rate loan will actually offer you a saving of Rs. 1.2 L even after including the processing fee.
This example makes it clear that the interest rate scheme where 8% is frozen for one year, may not actually be as profitable as it appears upfront. In fact you might save more opting for a home loan, which is a little bit higher than the 8% scheme offered.
This article is a sample case study stressing on the fact that one should look beyond introductory offers to arrive at the actual total loan cost to truly compare various home loan offers from banks. In this instance, it is clear that an introductory offer of 8% for a year in a 20 year floating home loan rate need not necessarily be better than a 9.75% or an 8.75% floating home loan rate, with other conditions being constant. This is subject to the fact that when the floating loan rates are revised periodically – they should not differ too much between the various banks, which will again affect how the total loan cost between banks differ.
One also needs to consider, will there be better or more expensive offers after a while on both the property prices and home loan interest rates that you can either gain from or lose out on by taking up this offer? These and more questions that may arise need to be given thought, apart from total loan cost before you consider taking up such loan offers.
I feel that the article has been written in a very amateur manner. In order to prove a point, the rate after a year in the first case has been taken as 10.25% while in the second case it has been taken as 9.75% for all the years to arrive at a low figure overall. This is extremely poor writing especially on subject such as this. Lay people may actually base their decisions on this! There is no way to predict which way the interest rates will go after a year or more and this kind of illustration is highly speculative and misguiding. MSN must fix this.
Shivani, the point here was not to mislead – rather it was to understand how the interest rate maybe spiked later – which makes the benefits from such a loan scheme irrelevant. True interest rates may swing either way but as a loan applicant you need to be aware of the total impact of any loan offer than to just take it at face value. The article illustrates only this aspect – to look more closely at any loan offer that you come across. Thanks.
I agree with Shivani. MSN should have better review mechanisms before publishing such poorly researched articles. need more maturity from the writers.
Vinvas,
Don't see the merit of your argument – the article merely says – be cautious -evaluate even the most attractive loan offer – before you decide whether to take it up or not.
Hi, You forgot the basic idea of "floating rate" in case of floating rate loan calculation. It changes upward every quarter and rarely downward.
So your calculation is not useful.
Varun..this is not essentially the case at all times.
This case study has been surely written by guys from private banking in particular HDFC bank as they have a grouse against the SBI scheeme which the example. Most of the private banks mislead customers by all these false calculations. i had taken home loan from one of the largest banks in the world which in doldrums now for its greed and now shifted happily to SBI. They dont explain the difference in the interest calculation, e.g monthly or annual in case of many private banks including HDFC. This is surely disadvantageous to the customer. Moreover schemes like SBI maxgain which offer customers the option of parking excess money in the current account linked to the loan account helps a lot by reducing the principal amount which will be considered for calculation of interest.
This is clear propaganda, also by the website, one look at the partners will tell the story, not single PSU bank only private swindlers in the list. Such articles should clearly disclose any conflict of interest of the authors other wise such things should never be published. It is high time govt and RBI took cognisance of such false propaganda like the IRDA does so that poor customers are not cheated.
Anand, if you notice the article does not take sides and it does not urge you to drop such an offer either – all the odds are laid out for you to make a final decision. Again the stress is on close scrutiny of loan offers even the ones that seem attractive!
I would request the author to kindly answer a simple Q in simple terms.
Why is there a difference in the floating interest rates between the two schemes and why does the 'floating' rate not change for the second scheme?
I understand that the article is just to educate the consumers but kindly use believable examples.
Hi Sabhyankar,
Thanks for stopping by. The article uses a very credible example, which did exist at one point in time. For the sake of preserving the neutrality of the article bank names/ product names have not been mentioned…and yes the article is there to educate people to look beyond the obvious.