Housing loan rate cut confusing borrowers

Raghuram Rajan, Governor, RBI, had expressed strong resentment against the management of banks for not passing on the benefits of the earlier two interest rate reductions of the central bank to the customers. Rajan’s growl led to banks and Housing Finance Companies (HFCs) reducing their interest rates on housing loans by 0.15 – 0.30 per cent. Many more banks will announce the rate cuts shortly.

The State Bank of India led the bandwagon with reduction in housing loan rates to 9.85 per cent which was earlier at 10.15 per cent. Many public sector banks, ICICI Bank, Axis Bank, DHFL, HDFC, India Bulls, LIC Housing Finance, GRUH Finance have followed suit and reduced their housing loan rates to the new customers and marginal cuts in rates for their existing borrowers.

The borrowers of housing loans are in a state of ecstasy, worry and confusion. Ecstasy
is for the new borrowers who will straightaway get the bene-fit of reduced interest rates in the range of 9.85 per cent to 10 per cent.

Worry is for the existing housing loan borrowers, whose interest rates, under the variable rate scheme, would have moved to higher levels in the range of 10.5 per cent to a staggering 14.5 per cent. The crux of the issue is the piquant situation of these existing loanees who will not get automatic benefit of the latest reduced interest rates.

This dichotomy of high interest rates for existing borrowers and very low rates, in single digit, to the new borrowers will make the existing borrowers think whether to continue their housing loans with the same lender or switch to a new bank, which is luring them with attractive reduced rates.

Option 1: To opt for a “reset“ of interest rate in the existing bank itself since it saves time and agony of “rate shopping”, administrative hassles of filing fresh applications, payment of processing fees and addressing the Credit Information Bureau (India) Limited (CIBIL) issues.

Most banks /HFCs offer to their existing clients the “reset route” for according the rate benefit to ensure that there will be no poaching of loans from other institutions. Otherwise, good loans will go out and bad loans will remain. The reset advantage will be in the range of 1 - 2 per cent reduction on their existing rates and will never match the existing new rates of 9.85-10 per cent.

This reset benefit will be accorded to customers whose repayment track record is excellent without instances of cheque dishonours of EMIs. So, an existing borrower whose current rate of interest is 13 per cent, under the reset route can get the reduced rate to the maximum extent of 11 per cent.

A nominal fee may also be levied for passing on this benefit. This option is advantageous to borrowers who have completed more than half the period of their loan tenure wherein more of interest would have already been appropriated from the EMIs.

Option 2: For the existing housing loan borrowers with a tenure of 15-20 years and who have completed 1-3 years of repayment, the initial rate of 10.5 per cent or 11 per cent could have moved higher to 12.5-13.5 per cent under the variable rate schemes.

The best and the appropriate option for this category of borrowers is to “shift” their loans to other banks who are offering rates in the range of 9.85-10 per cent. The borrowers will save substantial interest under this option. These borrowers who are shifting from one bank to the other will also not be levied pre-closure charges as directed by the RBI and the NHB.

Processing fee
Most banks are not charging processing fee for the take over loans as all the original work of credit appraisal, technical and legal scrutiny of title search, would have been done and perfected by the earlier institutions and the borrowers are tested and seasoned.

Even the long term property insurance can be transferred and assigned with the new bank or pro rata premium, refunded. Thus, customers have become the Kings in the present housing loan market by enjoying triple dhamaka – reduced interest rates in single digit, no pre-closure charges levied by the existing banks and no processing fees by the take over institutions!

Option 3: There are certain HFCs and banks which are offering "Fixed Rates" on housing loans which will be normally 2-3 per cent higher than the least variable rate of 10 per cent, which works out to 12-12.5 per cent throughout the tenure of the loan. "Combo loan offer" schemes of part fixed and part variable  rate are also available to the borrowers.
Customers who have the mental make up of assigning a fixed portion of their income towards housing loan repayments can opt for these schemes, as they will be insulated from rate hikes and the best entry point for these schemes is now,  when the interest rates are at  their lowest ebb.

(The writer is a Bengaluru-based banker)