How fixed is your fixed rate home loan interest rate?

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A fixed rate home loan, by definition, is one that is not affected by market fluctuations, i.e., the interest rate remains same during the tenure of the loan irrespective of the market conditions. Home Loans at fixed rate ensure that the borrower pays fixed equal installments during the complete loan tenure. However, fixed rate on home loan are typically 10–20 basis points (bps) higher than that on floating rate loans as the banks charge for the additional element of interest rate risk they take in case of fixed rate loans.

But how much of this definition stands true practically? In today’s financial world of interest rate vagaries and ambiguous loan agreements, it is quite common for banks to insert a clause in which your Fixed Rate loan may not actually be fixed.

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Reset Clause on Fixed Rate Loans

Nowadays, none of the prominent banks offer a real fixed rate loan where the interest rate on the loan remains constant throughout the loan tenure. There are loans with generally 2-5 years and sometimes up to 10 years fixed rate options available in the market, wherein the interest rate on the loan remains fixed for the specified period and shifts to a variable rate after the fixed-rate period. Ensure that you have complete clarity on the variable rate applicable to you when the loan shifts to the floating rate period. The bank should clearly mention the benchmark MCLR/PLR rate as well as spread it will charge for the floating rate loans at the time of loan sanction.

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Force Majeure Clause on Fixed Rate Loans

The fine print of many Home Loan agreements may include a clause that allows the banks to change fixed interest rates under exceptional circumstances such as strong fluctuation in market interest rates and change in bank’s internal policies after a certain period.

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Example: Mr. A got a Home Loan sanctioned a few years ago. He was ecstatic upon getting a great deal of 8.5% fixed rate for the first five years. After two years, he was notified by the bank that the rate of interest on his home loan has increased by 25 bps to 8.75%. Mr. A was taken aback! On checking with the bank, he was shown a Clause in his Home Loan Agreement in which the bank had the right to change fixed rates under exceptional circumstances (such circumstances not defined). The bank had missed out on verbally communicating such an important detail to Mr. A before finalizing his loan. Unfortunately, it was late and Mr. A had to pay higher interest rates.

Such clauses are called Force Majeure clauses which refer to a provision that relaxes the contractual obligations when certain beyond control circumstances arise, making adherence inadvisable, impracticable, illegal, or impossible. This clause takes away the essence of any fixed-rate loan. It does not provide any clear definition of changes in internal policies or extraordinary changes in the money market conditions. Ideally, these are meant to refer to situations of large scale disasters; a definition that has been distorted by banks to protect their liability.

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As a customer, you have the right to negotiate with your lender to remove the clause and protect your financial liability as well, especially so, when you are paying a higher interest rate on your fixed-rate loans. Even if you find the clause later, like in the case of Mr. A, you can always approach the banking ombudsman with your case or you can opt to transfer your loan to another bank at the lowest interest rates.

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