Banks won’t let you shuffle that home loan

Banks won’t let you shuffle that home loan

Early Reset Clause, Fixed Loan Curbs Make It Tough For Buyer

Sangita Mehta MUMBAI

BANKS are inserting new clauses in home loan agreements to protect their books amid hardening interest rates and rising defaults. These loan conditions will make life a little more difficult for borrowers who are struggling to pay higher EMIs.
Some banks have stopped giving fixed rate loans beyond a few years, a few have set an early reset clause while others are insisting on a lock-in period during which a switch from fixed to floating rates (and the other way round) isn’t possible. Borrowers who have taken home loans on floating rate have already seen it increase by three to four percentage points in the past 18 months to around 11.5-12%. With rising rates, new borrowers are looking at taking fixed rate loans, while the existing borrowers are thinking of a switch from floating to fixed rate loans despite a higher rate. However, banks are designing loan documents to discourage this.
A fixed rate loan is aimed at protecting the borrower against the risk of rising interest rates. But a reset clause will enable banks to charge a higher rate at the time of reset (if interest rates moves up). IDBI Bank and Union Bank do not provide fixed rate loans above five years. ”The fixed and floating rate concept is slowly losing its relevance. Over the past two occasions, we have not raised interest rates for existing floating rate customers, which means loans have been at a fixed rate of interest for them even as interest rates have moved up in the system,” said MV Nair, Union Bank of India chairman.
A number of other banks are offering a long-tenure fixed-rate option, but with a reset clause. Last month, Bank of India reduced its reset option on fixed rate home loans from 10 years to five years. Borrowers need to take close look at loan papers
JUSTIFYING the move to reduce the reset clause, D Krishnamurthy, general manager in charge of retail at Bank of India, said, “In such a volatile interest rate scenario it is not advisable for the customer and the bank to go for a fixed rate for a long time.”
The country’s largest bank — State Bank of India — with a home loan portfolio of almost Rs 38,000 crore, which is 13% of its total credit, has a reset clause at the end of two years. Canara Bank and Punjab National Bank have a reset option on fixed rate home loan at the end of five years; it is three years in the case of Allahabad bank.
PNB has recently inserted a lock-in clause in loan documents, wherein a customer cannot switch from floating to fixed and fixed to floating within three years of taking a home loan. “The move follows a requests from a number of big-ticket borrowers who were looking a switching loans from floating to fixed rate due to rise in interest rates. The move would protect the bank against an asset liability mismatches,” said N K Mehta, general manager of PNB.
SBI, on the other hand, discourages prepayment of home loans even if it is from personal sources such as saving. The loan documents of the SBI, where home loans account for half of its retail loan portfolio, says that the customer has to pay 2% penalty on the loan amount that is prepaid before the expiry of half the original tenure. Thus, on a 15-year loan, if a customer pays the entire outstanding within seven years, the bank would charge him a 2% penalty on the last amount paid, even if it is paid from personal savings and not by switching to another lender. This, SBI officials say, will protect them against unexpected cash flows.
Bankers concede that borrowers will have to take a closer look at home loan documents before signing on the dotted line. “As a public sector bank we may take into account customers’ repayment capacity while tinkering with rates, but others may not do so,” said Mr Nair of Union Bank.
sangita.mehta@timesgroup.com