Why home loans are set to be cheaper this year

With rate cuts by the RBI on the horizon this year, new borrowers stand to gain as banks pass on the benefit to them. If they also cut their benchmark base rates (to which home loan rates are linked), it will benefit the existing borrowers as well. “A drop in interest rate increases the eligibility criterion of the borrower. Even if there is a fall of 50 basis points, the EMIs will be reduced by Rs 30 per lakh (see table). It would also increase the eligible loan amount by Rs 60,000-70,000,” says Rajiv Raj, director, CreditVidya.


This should be good news for those who have been reeling under the high mortgage payments. They will not only have the option of switching to a lower rate with their existing lender, but also changing to lenders who offer a better deal. Even so, here are a few points to keep in mind.

Rates won't be cut at one go: The RBI is likely to cut rates in stages. The banks, on their part, may decide to wait for some time to pass on the benefit to borrowers. “Rate cuts will happen gradually in stages of 25-50 basis points after certain intervals,” says Manavjeet Singh, senior president (retail banking), YES Bank. Banks also have differential interest rates based on the loan amount and you may not benefit immediately from the cut.

Cost of switching: The existing borrowers also need to consider the cost of switching to a new lender. “A new bank will treat it as a fresh loan application and the borrower will have to undergo the same process that he undertook while applying for the loan all over again,” says RK Bansal, executive director, IDBI Bank. “The bank will evaluate the property papers and other documents again, and the cost for this will have to be borne by the borrower in terms of processing charges,” he adds.

So, should you stay with your bank or shift to a new one? “If the difference in the interest rates is more than 1%, after factoring in all the costs, shifting to another lender would be advisable,” says VN Kulkarni, chief counsellor at Abhay Credit Counseling Centre. However, before you decide to shift, try to renegotiate the interest rates with your existing lender. “Many banks are open to the idea of renegotiating the interest rate for the existing customers with a good payment history, rather than losing him to another bank. However the client will need to pay 0.5-1% of the outstanding loan as processing charges,” says Bansal.



Some banks charge new customers 0.25-0.5% lower rates compared with those for the existing customers. Depending on how you renegotiate, it may still be economical than shifting to a new bank. According to Kulkarni, though the RBI has advised banks not to charge a prepayment penalty, some still levy a foreclosure penalty. “So, in this scenario too, it makes more sense to renegotiate with your existing bank,” he says.