Bide your time on that loan

The RBI decided against giving an early Christmas gift to borrowers in its Policy Review meet last week by maintaining the status quo on interest rates. So what’s the way forward for home loan borrowers, both existing and prospective?

If you are looking to borrow immediately, opt for the cheapest home loan without worrying about when rates will fall.

SBI and ICICI Bank offer the lowest rate of 10.15 per cent. At both banks, women borrowers are charged lower interest of 10.1 per cent. A few PSU banks — Bank of India, Canara Bank and UCO Bank — offer 10.2 per cent home loans. The largest home lender, HDFC, offers a 10.15 per cent home loan.

Banks offering the cheapest loans are the most likely to tweak their base rates when the RBI does cut interest rates. Some banks, such as SBI, have already lowered rates on their deposits. A fall in policy rates will trigger a quick cut in lending rates for banks who have already brought their cost of funds down.

When you are looking out for the best deal, keep in mind that you don’t fall for fixed rate loans.

With interest rates peaking, this is hardly the time to lock into fixed rates. You will lose out on better deals in the coming months. Also, pure fixed rate schemes charge too high a premium. Axis Bank, for instance, charges 11.75 per cent, a good 160 basis points higher than its own floating rate home loan.

Aside from pure fixed rate schemes, banks and housing finance companies also offer dual rate schemes, wherein rates are fixed for one or two years and then get converted into floating rates. Some of these rates are comparable to those offered under the floating rate option. But at this juncture, it is not advisable to go for dual rate schemes either for the same reason mentioned above.

If you already have a home loan, staying put seems to be the best option at this juncture, unless you have taken a loan at much higher rate than what most banks offer currently. For example, today, floating rate home loan interest rates range from 10.15 per cent to 10.25 per cent for loans up to ₹75 lakh.

Even if you are paying much higher, it’s best to do a cost benefit analysis before deciding. The benefit of switching your loan is clearly the interest savings. A quick calculation shows that it would be best to make the switch if you can save at least 50 basis points more as interest.

When you try to reset your interest rate within the same bank, the bank will usually charge a conversion fee based on the nature of the loan. If you want to move from a pure fixed rate loan to a floating rate loan, the charges are usually in the range of 1.75-2 per cent of the loan amount and also include service charges. But the conversion charges are a lot less if you want to switch from a higher floating rate to a lower floating rate loan. Here, the charges are around 0.5 per cent in most cases.

If you are looking to switch from one bank to another, remember that in case of floating rate schemes, pre-payment charges have long been done away with. But banks charge a pre-payment penalty in the case of fixed home loans. In most cases, the penalty is around 2 per cent on the loan outstanding.

Once you have foreclosed your loan, you then approach a new bank for a fresh loan. Here, banks charge a processing fee, which ranges from 0.5 to 1 per cent of the loan. There could be an additional service charge too. But look for waivers offered by few banks. So before you switch loans, make sure that your savings are worth the effort.