Floating loans still rule the roost in housing turf

MUMBAI: Home loan buyers continue to go in for floating rate loans despite a series of rate hikes. Fixed rate home loans have risen from a low of around 8% in ’04 to over 10.25% in ’06, while floating rates have also gone up by over 2% during the same period.

Bulk of the outstanding home loans has been raised in the last two years when interest rates have been rising. Most of the borrowers, comprising more than 85% of the outstanding loans, have chosen the floating rate option.

Because of the hike in interest rates, these borrowers would now have to pay more than what they envisaged. Since the monthly pay out or the equated monthly instalment is fixed, floating rate customers see the tenure of their repayments getting extended.

“The ratio of customers opting for floating rate loans as against those opting for fixed rate loans has not changed. Still, about 85-90% of our portfolio is floating,” said Chanda Kochchar, deputy managing director, ICICI Bank. She added that no slowdown in growth was expected as the growth was coming out of fundamental factors. “The rise in income level is still very strong, while interest rates are still lower than what they were six years ago.”

New borrowers continue to opt for floating rate for a number of reasons. First, there continues to be a difference of over one percentage point between the fixed rate and the floating rate in home loans. The high difference is an indication that lenders expect rates to continue to move upwards and they want customers to take floating loans to hedge their own risks.

Most economists expect interest rates to plateau off by the end of the current fiscal. This is because central banks across the world are expected to have reached their target levels.Moreover, RBI is also expected to move to an accommodative phase in the second half when there is traditionally a high level of economic activity.