Interest rate cut: Freeze best option before policy revisit

The surprise repo rate cut by 50 basis points (bps) at 6.75 per cent by the RBI coupled with an increase in the loan to value (LTV) ratio to 90 per cent for loans up to Rs 30 lakh recently has led to a ‘rate’ race amongst the banks and housing finance companies (HFCs). 

Most banks — public, private and HFCs — have responded positively by reducing their base rate in the range of 20-40bps followed by immediate reduction in their lending rates to housing, personal and vehicle loans. The reduction spree, specially during the festive season, had been well received with enthusiasm by the customers and the builders.

These positive policy initiatives will not only result in reduced interest rates to the housing loan borrowers but will also enable them to avail higher quantum of loans. The housing finance activity will also diffuse the asset bubble that was brewing and help the builders to liquidate the huge unsold stock of apartments pan-India.

Banks and HFCs are now offering housing loans at variable interest rates in the range of 9.65 per cent – 9.80 per cent. Reduction in interest rates on housing loans, being long term in nature (15-30 years) will result in substantial savings to the customers. The housing loan borrowers are in a state of confusion and dilemma. The new borrowers will surely have the advantage of straightaway getting the best rates for housing loans, at less than 10 per cent.

The dilemma, however, is for the existing borrowers who have already availed housing loans and are at different periods in the loan tenure cycle. For existing borrowers who have availed housing loan for 15-20 years and have completed five years repayment, the present rates would be in the band width of 11-15 per cent. Even when the banks pass on 20–30 bps reduction to this segment, their rates will still be higher and above 10.5 per cent. This category will be the most unhappy lot.

Still, the existing borrowers whose loan repayment track record is good without any instances of cheque returns of their equated monthly instalments (EMIs) and credit rating score of CIBIL above 800 have few options which can be judiciously exercised.

Option 1: Existing borrowers to aggressively negotiate with their present bankers and HFCs for a substantial reduction in the rate, over and above the small quantum of 20-30 bps automatically passed on.  Such rate can be at 10.5 per cent as against the new rates offered to fresh borrowers which is less than 10 per cent.

The rate reset option is desirable, even with a nominal fee as it will save the hassles of “marrying” a new bank all over again, avoids repeat of the entire loan process, payment of processing fees and other incidental charges. This option is very advantageous to borrowers who have completed little more than half their loan tenure where most interest component would have already been paid up.

Option 2: For the existing borrowers with loan tenure between 15-30 years and who have just completed repayments between 1-4 years, the best option is to switch over the loans to institutions which are offering the least interest rates around 9.65 per cent. There are special schemes where interest rate is 9.55 per cent and even 8.9 per cent in cases where the property is in the name of woman or jointly owned with their spouses. These interest rates are fixed for three years and loan gets repriced in the fourth year. This scheme can have a loan quantum cap of Rs 15-20 lakh.

Moreover, as per the norms of the RBI and National Housing Bank (NHB), existing borrowers who switch over from one bank to the other cannot be levied pre-closure charges.

“Loan hopping”
The market is already experiencing the euphoria of “loan hopping” as most banks are offering fresh loans with “zero processing fee”. Even the existing property insurance assigned to a bank can get transferred to the new institution or pro rata premium refunded.

Option 3: For conservative borrowers who are comfortable in allocating a fixed amount of their salary towards the housing loan repayments can opt for “fixed rate” housing loan products which will be normally 2 per cent higher than the least of the variable rates offered in the market. Presently, it can be in the range of 11.75-12 per cent. This option can be exercised upfront for the full tenure of the loan and is insulated against either increase or decrease in the interest rates.

Those who envisage increase in salaries over a period of time, can opt for “flexi loans” which are designed with part fixed and part variable (combo offer) with rate resets at definite intervals. There are schemes known as Graduated Repayment Instalment Loans (GRIL).

Joint income earners who are young and have good career progression, can opt for GRIL wherein instalments can be stepped up at periodic intervals of 60 months in the loan tenure of 25- 30 years. The Decreasing Repayment Instalment Loans (DRIL) is opposite of GRIL and permits payment of higher EMIs initially – it reduces the instalment burden as the loan tenure advances.

In the present scenario, customer is the king. It will be wise to quickly freeze on the best option before the rate party comes to an end when RBI revisits the policy rate which is linked to CPI inflation. The NHB is even contemplating to permit HFCs to levy pre-closure charges if loans are closed in less than two years to prevent poaching and cannibalisation of loans.

(The writer is a Bengaluru-based banker)