Fixed-floaters carry risks

The home loan market is set for some tough competition in the coming days with India's largest housing finance company HDFC launching a fixed-floating scheme. Sachin Kumar reports | How the new home loan schemes stack up

The home loan market is set for some tough competition in the coming days with India's largest housing finance company HDFC launching a fixed-floating scheme.

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Under fixed-floating home loan schemes, interest rate on home loans is generally fixed for one-five years, after which users switch to existing floating rates.

India's largest private sector lender ICICI Bank had launched a similar scheme last month to lure to lure customers (see table).

However, experts advice caution. Customers should avoid such schemes as interest rates are expected to fall.

"Home loan buyers should go for floating home loan schemes than fixed-floating ones," said Vipul Patel, director, Home Loan Advisors. "In the short-term, interest rates on home loan may go up by up to 1% but after that they may fall by 2.0-2.5%."

"This product is for people, who do not want to take any risk on interest rates and want to freeze those rates," said Keki Mistry, vice chairman and CEO, HDFC, and are in addition to normal floating rate loan products.

"Fixed first" schemes, as they are called, offer a fixed rate (ranging from 10.5% to 11.8% depending on the loan amount) for the first three or five years, after which the loan will automatically switch to HDFC's Adjustable Rate Home Loan.