How floating rate home loan customers lose out?
Banks/ HFCs are reducing floating rates only on new loans. Old customers lose as these rates are linked to internal benchmarks. Rise in home loan interest affects EMI
By TNN |
If you are planning to buy a new house, there is some good news for you. Some leading banks have reduced the interest rates on all retail loans (including home loans) by 0.5-1 %. Even HDFC has slashed its floating rates on home loans by 0.5% to 10.5% p.a.
Now, SBI offers floating rates on homes at 10.5% as against the previous rate at 11.25% for loans up to Rs 20 lakh. For loans above Rs 20 lakh, the bank is charging a higher rate at 10.75%. These rates are applicable up to December 31, the bank said in a statement. HDFC has reduced the floating rate to 10.5% from 11% in line with the season of festivals in the offing.
However, old customers have been left out of these rate cuts. If you have opted for a floating rate, you will assume when the interest rate falls, the banks/ HFCs will pass on the benefit to you. But that’s not always the case. As bankers say when the cost of funds inch up by almost 0.25%, the home loan rates have been increased by almost 0.5% to protect their margins. However, the cost of funds will have to fall by 0.5% to reduce the home loan rates by at least 0.25%. In short, you are more susceptible to rate hikes than otherwise.
New customers versus old customers
Customers often complain that existing ones are always left out of these rate cuts. Even when HDFC had rolled out its ‘Monsoon Hungama’ offer , the 0.25% cut in the home loan rates was applicable only to new customers .
Similarly, in a rising interest rate scenario , the bank tries to discount the rate by at least 0.25% to acquire the new customer . The old customers lost out both ways.
How floating rate home loan customers lose out?
A home loan rate is linked to an internally computed reference rate such as prime lending rate (PLR) or mortgage reference rate (MRR). There is a difference of 2% between the reference rate and the effective rate. Whenever this reference rate increases, it pushes up the home loan rates as well. There is usually a gap of 200 basis points. But in the past one year, the gap has been varying in case of different borrowers implying that old and new customers are charged different rates.
Says an independent industry expert: “One of the main reasons why floating rate customers are unable to take advantage of falling rates is that banks link floating rates to internal benchmarks. A benchmark rate must ideally be an external, market-related rate.”
In developed economies, the benchmark rates which decide the effective rate on home loans are an external rate and banks do not have complete control over it. But in India, the benchmark is the prime lending rate (PLR), which is calculated by the bank itself. But the fact is that a bank does not lower the PLR unless the cost of funds falls considerably .”
Now, SBI offers floating rates on homes at 10.5% as against the previous rate at 11.25% for loans up to Rs 20 lakh. For loans above Rs 20 lakh, the bank is charging a higher rate at 10.75%. These rates are applicable up to December 31, the bank said in a statement. HDFC has reduced the floating rate to 10.5% from 11% in line with the season of festivals in the offing.
However, old customers have been left out of these rate cuts. If you have opted for a floating rate, you will assume when the interest rate falls, the banks/ HFCs will pass on the benefit to you. But that’s not always the case. As bankers say when the cost of funds inch up by almost 0.25%, the home loan rates have been increased by almost 0.5% to protect their margins. However, the cost of funds will have to fall by 0.5% to reduce the home loan rates by at least 0.25%. In short, you are more susceptible to rate hikes than otherwise.
New customers versus old customers
Customers often complain that existing ones are always left out of these rate cuts. Even when HDFC had rolled out its ‘Monsoon Hungama’ offer , the 0.25% cut in the home loan rates was applicable only to new customers .
Similarly, in a rising interest rate scenario , the bank tries to discount the rate by at least 0.25% to acquire the new customer . The old customers lost out both ways.
How floating rate home loan customers lose out?
A home loan rate is linked to an internally computed reference rate such as prime lending rate (PLR) or mortgage reference rate (MRR). There is a difference of 2% between the reference rate and the effective rate. Whenever this reference rate increases, it pushes up the home loan rates as well. There is usually a gap of 200 basis points. But in the past one year, the gap has been varying in case of different borrowers implying that old and new customers are charged different rates.
Says an independent industry expert: “One of the main reasons why floating rate customers are unable to take advantage of falling rates is that banks link floating rates to internal benchmarks. A benchmark rate must ideally be an external, market-related rate.”
In developed economies, the benchmark rates which decide the effective rate on home loans are an external rate and banks do not have complete control over it. But in India, the benchmark is the prime lending rate (PLR), which is calculated by the bank itself. But the fact is that a bank does not lower the PLR unless the cost of funds falls considerably .”
However, in the above mentioned rate cuts, the banks or HFCs have not tinkered with the benchmark rate. What they have done is they are offering a larger discount on the benchmark. If a bank lowers the PLR or the benchmark rate then it has to pass on the benefit to both the old and new customers .
Different strokes for different folk
One of the main reasons why a bank pitches a lower rate to new customers is to acquire them. Explains a senior banker: “Today there is a lot of competition in the home loan market. So, we always try to work around our rates depending upon what our competitor gives. In fact, when our representative meets the customer, he/ she asks the customer if they have visited any other bank. We ask them about the other bank’s quote on interest rate before giving out our details. We can’t keep negotiating on the rates all the time. But, if possible we may undercut up to 0.25% depending upon the loan amount and tenure of the loan.”
Moreover, there is always inertia for an existing customer to change the home loan provider when they are already repaying a loan with another bank/HFC. This intention is further deterred by slapping a prepayment penalty if a borrower decides to walk out on the service provider. If a borrower plans to prepay the loan for its termination then the borrower is still willing to cough up more funds to pay the 1.5-2 % penalty.
So, the bottom line is before you sign on the dotted line with your home loan provider, just shop around to see you have got the best rates.
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