How good is ABN Amro home loan offer?

ABN Amro Bank created headlines when it announced the lowest ever interest rates on home loans last month.

While it may have taken the media by storm, the hype created has not exactly translated into queues at the bank.

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With the housing finance sector coming out with series of rate cuts time and again, and the sub-industry rates valid for just two years, loanees are just not ga-ga over what is called the super saver loan package.

ABN Amro's unique product follows customer research, which shows that the biggest concern of the home loan customer is his ability to manage the stress of monthly finances in the initial stage of the loan period.

Other home finance companies, however, disagree and some offer a three-month coverage of the monthly installment against the possibility of retrenchment.

Pink slips have started becoming the order of the day even among public sector undertakings.

Ashish Kumar, who has been shopping for a home loan for Rs 15 lakh (Rs 1.50 million), is skeptical about the structured offer, fearing that should interest rates harden in year three, he would then need to pay a higher interest.

With rising inflation on the whole, and interest rates being a function of the same, current low bias on interest rates is not sustainable.

Moreover, recovery in the United States is on the cards and this will push up interest rates. Once global rates start to rise, India cannot afford not to follow suit.

The foreign bank is offering a reduced interest rate of 6 per cent and 6.5 per cent in the first two years of the loan irrespective of the tenor or quantum of the loan.

It then leaves the door open to speculation as to what would be the rate of interest from year three onwards.

ABN Amro's executive vice president and country representative Romesh Sobti said, "We will offer market-related interest rates." Today, ABN Amro is offering 7.75 per cent floating rate and 8.25 per cent fixed rate.

Even if one were to work out the difference based on the existing floating of 7.75 per cent, the difference works out to 3 per cent in the first two years of the loan.

As most home loans are of 15-20 years tenor, over 20 years, the 3 per cent works out to 0.15 per cent benefit per annum.

"It's just a treasury product subsidising future receivables in the first two years. Any new player needs to pitch its rates lower in order to capture market share," said Kumar, who happens to work in the treasury department with a leading private bank.

So if the home loan rates remain soft as they are today, the benefit over the entire tenor of the loan works out to 0.15 per cent at best.

It could even be less. "I fear the bank might exercise its right to change interest rate at any time without any notice as interest rates increase," added Kumar.

If interest rates should rise in two years, ABN Amro's offer will fail to give the flexibility in locking in one's liability at the prevailing soft interest rates.

While in the short term, interest rates have room to fall further, long-term rates are not expected to remain soft, considering the rate of inflation.

Interestingly, ABN Amro does offer a spilt rate option, where one can take part of the loan on fixed basis and partly on floating basis.

Kumar is, however, happy over the fact that ABN Amro allows prepayment of the loan. Being in the treasury department where he gets sizeable bonuses annually, Kumar thinks he can prepay his loan within five years, but he cannot afford a high monthly instalment.

ABN Amro allows free prepayment of loans up to 25 per cent of the outstanding yearly, limited to one time in a year.

After the completion of the fifth year, the bank will not levy any prepayment charge. However, in the case of refinancing, prepayment charges will be levied.

All in all, even as housing finance is the most competitive industry today offering lowest possible rates, industry leaders have failed to react.

Some point out that ABN Amro's variation of home loan product offering softer initial interest rates, is no different on an all in cost basis over other products when compared to 15-20 years.