Can you afford to ignore LIC Housing's New Fixed 10 home loan?

LIC Housing Finance Ltd launched two new home loan schemes this week called Bhagyalakshmi plus and New Fixed 10.

While Bhagyalakshmi Plus is available for women borrowers who are sole owners or first owners of the property, the rate of interest will be fixed for the first two years at 10.35 percent for loans up to Rs 75 lakh. Once the initial two years are over the loan will shift to the floating rate regimen. On conversion to floating rate, the borrower will get a discount of 25 basis points on the interest throughout the loan term.

VK Sharma, MD and CEO of LIC Housing told Firstpost, “And internal study of the credit appraisal system loan book showed that women- borrowers, especially as sole owners or first owners, have a good repayment history, and a near zero delinquency rate.” And, since the risk with such borrowers is lower, the incentive is passed on to the women borrower as a 25 basis point discount.

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[caption id=“attachment_1090205” align=“alignleft” width=“380”]  The interest rate of LIC’s New Fixed 10 home loan is 11.50 percent for ten years, while other lenders in the market are offering fixed rate loans in the range of 11.25 percent to 13.75 percent.[/caption]

But the loan we will discuss in detail today is the New Fixed 10.

What is it: Sharma told Firstpost. “We launched New Fixed 10, wherein it (LIC Housing) would charge borrowers a fixed interest rate of 11.50 percent for 10 years. And after the first five years the customer has the flexibility to convert his or her loan into the floating rate prevalent at that time.”

Finer details of the scheme: The fixed rate of 11.50 percent is available for loans up to Rs75 lakh. The processing fee for the loan could be as less as Rs 5,000 to a maximum of 1 percent of the amount. Sharma, says, “The processing fee can also be waived off depending upon the ticket size of the loan, as well as the type of customer.” If you prepay the loan during the floating rate period of the loan, you won’t have to bear prepayment charges. In fact, even during the fixed rate period, if you, prepay from your own sources of funds, you won’t need to pay a prepayment penalty. However, Sharma says, “If you prepay the loan during the fixed rate period with funds which are not from your source (another lender), you will need to pay a prepayment penalty, which could be a maximum two percent of the loan outstanding amount.”

Analysis: The interest rate of the New Fixed 10 home loan is 11.50 percent for ten years, while other lenders in the market are offering fixed rate loans in the range of 11.25 percent to 13.75 percent. But the question here is: should you really go for a fixed rate loan at this point of time in the market? Floating rate home loans available in the market today are in the range of 10 -12 percent. A loan expert we spoke to, who did not want to be named, said: “Currently, SBI is offering a floating rate loan at 10.25 percent. There is absolutely no point in paying more than 100 basis points more.” In fact, Ranjit Dani, Certified Financial Planner, told Firspost, “11.50 percent is expensive as compared to other floating rate options out there. We are almost at the top of the interest rate cycle, and interest rates are expected to see a fall in a year of so. Why would anyone want to get locked into a higher rate, when interest rates are expected to fall?”

Harsh Roongta, CEO, Apnapaisa.com, says, “It’s not about LIC Housing Finance or HDFC; conceptually you should understand that you are paying a 1 percent premium over what is available out there to get peace of mind about a predictable EMI amount. But this 1 percent premium is too big an amount, considering that for the floating rate loan the rate has to move by more than 100 basis points to justify the premium you would pay for the fixed rate loan.”

End note: The truth is no one can be sure when the interest rate cycle will turn. But looking at the present economic scenario, getting locked for 10 or five years at 11.50 percent seem a bit too expensive, especially when floating rate loans are cheaper by more than 100 basis points. The unnamed source mentioned above also said, “With the new RBI Governor now, who knows what the next monetary policy will bring in? Still, 11.50 percent is expensive to get locked into for 5-10 years.”

But there are some people who could possibly see this premium as worth paying. Dani says, “The utterly lazy people who are ignorant about money or careless about money could take this loan. Even now, there are many people out there who were on the floating rate regime and never bothered to track rates; they now pay 14 percent when they started their loan with 7.5 percent. So, if you are someone who simply doesn’t want to track floating rate movements, this loan might just work for you.”