Vidyalaxmi, ET Bureau Dec 27, 2012, 05.54AM IST
A rate cut (or a series of cuts if you will) is imminent in the New Year, claim banking experts. And nobody wants it badly than the existing home loan customers. The second half of 2012 saw rate cuts by some banks. During the festive season, most banks and housing finance companies like SBI, HDFC, Bank of Baroda, ICICI Bank, among others, have slashed floating rate home loans in the range of 0.5-1%. This followed the Reserve Bank reducing the cash reserve ratio in its policy review.
However, it was no show for the existing borrowers, as they did not see any reduction in their home loan EMIs or the tenure of the loan. Now, they are waiting for the “imminent rate cut” in the coming year.
However, some of them are also a bit confused: they are not sure whether they should switch to a lower rate or opt for a balance transfer immediately after a policy rate cut by RBI, followed by reduction in home loan rates by banks. Or should one wait for a while to see if there are any further cuts in home loan rates?
This can be really tricky because every time interest rates come down, the old home loan borrowers will continue to pay a higher rate unless the bank lowers the base rate. And it won’t be possible for them to go through the same exercise of transferring or switching loans after every rate cut.
“Wait for the January policy review (already announced on 27th January 2013), as it is widely expected that banks will actually go ahead and reduce the base rate, which will have an impact on their home loan rates too. Once the base rate comes down, then the borrower should try and negotiate further with the existing lenders and try to get the rates at par with the rates quoted to new home loan borrowers,” says Vipul Patel, director, Home Loan Advisors, an independent mortgage consultancy firm.
Even though the Reserve Bank left the key policy rates unchanged in the policy review in December, it reduced the cash reserve ration (the percentage of deposits banks must keep with RBI) in the two earlier policy reviews. Most banks subsequently reduced their floating rate home loans. However, none of the banks lowered the base rate/benchmark rate. That means the existing borrowers continue to pay at least 0.5-2.5% more than prospective or new home loan customers.
“Today there are home loan borrowers who are paying an interest rate of 12.5% on their housing loans and the more recent borrowers are repaying at 10.15%. That’s a difference of 2.35%, which is very huge,” 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 the old borrower and the new one would be around 162 per lakh. However, if a borrower is paying anywhere above 1% than the prevailing interestrates, he/she can consider a switch even before the policy review.
“Borrowers who are paying 1.5-2% higher should consider a balance transfer or switching to lower rates at the earliest. Even if the banks lower base rate, it would be around 0.25% and the home loan rates will alsolower by 0.25%. Still, old home loan borrowers will be paying at least 1.25% higher than others,” says Pankaj Mathpal, certified financial planner and managing director, Optima Money Managers.
“Subsequently, even if the bank lowers the home loan rate by 0.25% without tinkering the base rate, this difference works out to 17 per lakh. If the bank lowers the base rate, they will pay at par with new borrowers.”
An existing home loan borrower has the option of either switching to a lower rate within the same bank by paying 0.5-1% of the outstanding loan amount as one-time switching charges. Secondly, they can opt for balance transfer by shifting to another bank. This can also be considered a cost-effective option with the abolition of prepayment penalty.
However, this process has additional costs since it will involve documentation like a new home loan process. “If a borrower has taken a housing loan of 50 lakh, the legal and valuation charges, stamp duty processing fee etc should cost around 15,000-20,000. The borrower should get the exact cost break-up with the new lender before making the decision,” says Harsh Roongta, CEO, Apnapaisa.com. However, with the abolition of prepayment penalty, a borrower can consider this process if the one-time switching charge is more expensive than these charges.