Wednesday, 19 September 2012

News Hour - How old borrowers can benefit from home loan rate cut

Many home loan borrowers, who were hoping for a reduction in interest rates, are clearly disappointed with the Reserve Bank of India, which left the rates unchanged in its policy review. They are not enthusiastic about the dovish policy statement, which many bankers say clearly indicates the rates may start coming down gradually. Their main grouse is that even though many banks, especially public sector banks, have already lowered interest on floating rate loans by 0.25% — which translates into a saving of Rs 17 per Rs 1 lakh — these banks have not changed their base rates or the benchmark rate they follow.

This means only new borrowers will benefit from the new lower interest rates announced by these banks. As for old home loan borrowers, they still have to pay a higher rate on their home loans. "Even today there are some old borrowers who are paying an interest rate of 12.5% on their housing loan. But today a new borrower can get a housing loan even at 10.5-11 %, which is 1.5-2 % cheaper," says VN Kulkarni, chief counsellor with the Bank of India-sponsored Abhay Credit Counselling Centre.

In monetary terms, the difference between the EMIs paid by an old borrower and a new one would be around Rs 104 per Rs 1 lakh. "A banker can claim that the old borrower entered into a loan agreement at a time when cost of funds were much higher. Today customers are benefitting from lower cost of funds. However, this is just a policy decision by banks, there are no technical glitches in passing the benefits of lower interest rates to new customers," adds VN Kulkarni.

Number Of Rate Cuts, Yet No Benefit

Banks have started reducing interest rates following the RBI's decision to cut the statutory liquidity ratio (SLR) from 24% to 23% in August. State Bank of India (SBI) reduced its home loan rates by 0.50-0 .85% for its new customers. Several other public sector banks followed suit.

Only Bank of BarodaBSE 2.40 % and Central Bank of IndiaBSE 7.00 % have extended the benefit of rate cuts to its old home loan borrowers. Earlier in April this year, the RBI had cut the repo rate by 0.50%. Subsequently, some banks such as ICICI BankBSE -1.28 %IDBI BankBSE 3.50 %Kotak Mahindra BankBSE -1.44 %, Central Bank of India and Punjab National BankBSE 4.97 % cut their base rates (benchmark lending rate) by 0.25%.

How old borrowers can benefit from home loan rate cut

At that time both the old as well as new home loan borrowers benefitted from the falling interest rate. However, this time, the banks have not tinkered with the base rate. They have lowered the interest rates only on floating home loans. Hence, old customers have not received any benefit from rate cuts.

"A bank always focuses more on acquiring a new customer at a cheaper rate than incentivising an existing customer. Once the home loan borrower has been locked at a particular rate, any exit options comes at a cost. This can get tricky for the non-savvy borrowers," says Madan Mohan, chief counsellor at Credit Vidya, a credit counselling firm.

Exit options

At this stage, the old borrowers have two options. He/she can pay switching charges and move to a lower rate within the same bank or switch to another lender. "Borrowers should try and negotiate with their existing lenders to reduce the rates and/or the fees/costs associated with reducing the cost involved in such reduction," says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.


1 comment:

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