"The treasury bill linked home loan is in line with global best practices, local and regulatory expectations on the use of external benchmarks, and also offers clients a better experience," says Shinjini Kumar, country business manager, global consumer banking, Citi India. Independent experts said that the spread remaining constant throughout the loan tenure is another sign of transparency. According to experts, the current interest rates being offered by Citi are also competitive (see table).
The flip side that customers need to watch out for is that their home loan rate will change more frequently (every quarter), than when it was reset every six months or every year.
Borrowers will need to track interest rates closely. "Most people take a home loan based on the EMI they can service today. They don't factor in what it will be in nine months or a year. With a product like this, they will have to borrow conservatively, especially now, when rates appear to be headed upward," says Arvind A Rao, financial planner and founder, Arvind Rao and Associates.
For young borrowers, a more volatile rate may make less of a difference since the bank is likely to increase their loan tenure. Over a 20-year span, the upward and downward movement of interest rate could well even out. But in case of borrowers close to retirement, banks don't extend the tenure beyond the retirement date. Instead, they hike their EMI. Such borrowers will need to be more cautious. Furthermore, when interest rates begin to move upward, they can keep on rising for two-three years and by as much as 2.5-3 percentage points. Borrowers should factor in that kind of rise when deciding on their loan amount.