‘Most borrowers should opt for such a product’
The fixed-floating rate home loan product that the SBI chairman is talking about is not like the teaser loans of the past. In a teaser loan, the customer starts with a lower interest rate, which then keeps increasing with the passage of time. Hence his
EMI also increases at intervals.
Floating-fixed rate loans are more of a treasury call. By fixing the interest rate for a certain period of time, say two-four years, the bank takes the interest-rate risk upon itself.
Internationally, when banks offer a fixed-rate product, they do so at a slight premium to the interest rate they charge on a floating-rate loan. Banks, on their part, hedge their interest-rate risk. They then add the cost of hedging when deciding the interest rate on the fixed-rate product. By hedging, they transfer interest-rate risk off their books.
Fixed-floating rate loans also allow banks to manage their interest-rate risk better. They have to bear the risk only for a limited period. Once the customer moves to a floating rate after a few years, the risk gets transferred to him.
For many non-savvy borrowers, a fixed-floating rate product will make sense. They will be able to control interest-rate risk on their home loans for a few years. In many international markets, there are products where the customer does not move to a floating rate after the fixed-rate period ends. Instead, he can move to another fixedrate period. Only the interest rate for this period is set anew. Even that is a good option. Most retail borrowers should opt for a fixed-floating rate loan product even if they have to pay a slight premium in interest cost, as it is difficult for most borrowers to take a call on interest-rate movements. As for savvy borrowers, if they believe that interest rates are set to decline, they may opt for a floating-rate product. But if they believe that rates will rise, they could opt for a fixed-floating rate product.