Are fixed rate home loans really fixed

Once you decide to avail a home loan, the next thing that storms your brain is choosing between fixed and floating rate of interest. And here is where you are caught in a catch 22 situation.

Usually, when news media splashes reports on banks increasing home loan interest rates in India and their impact on Equated Monthly Installment (EMI), you deem it better to opt for fixed home loan rate. In fact, your banker may also advise you to go for the same.

Now ideally as it should be, we assume that once you select fixed rate plan for yourself the rate of interest will remain unchanged over the entire tenure of the repayment period irrespective of any subsequent increase in the same. But actually this is not the case.

Here we demystify the nature of fixed interest rate housing loan transaction for you so that you could make an informed decision over the matter.

• All the banks include the reset clause on fixed interest rate in their home purchase loan agreement papers. So if you had taken the loan @ 10.5 per cent for 15 years it does not mean that the same rate will be applicable all across the period.
• India’s largest public sector bank State Bank of India (SBI) has introduced a clause as per which it has right to revise the fixed rate home loan after two years. Similarly, Canara Bank and Corporation Bank also have similar provisions to revise the rates after 5-years of disbursing the loan.
• Private sector banks and Non Banking Financial Corporations (NBFCs) are also following the same policies and the rates too are revised from time to time.

Force Majeure Clause
So, while you read your home loan agreement papers, you can spot statement like this:

“Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.”

This is called Force Majeure Clause that enables the lender to undertake appropriate modifications in the interest rates on home loans they sanction to their borrowers.
***