It's a home loan rate cut war out there. A large number of banks and housing financial companies are cutting their home loan rates or are keeping it fixed for the first two to three years to capture market share. While the State Bank of India and HDFC Ltd have the first mover advantage others are playing catch up.
But will this intense rate cut war help Indian consumers of home loans? What are the pros and cons of availing such a home loan product?
In a chat with Get Ahead readers on December 11, home loan expert Harsh Roongta answered these and several other queries related to teaser home loans.
For those of you who missed the chat, here is the transcript.
Saj asked, I've ICICI Home Loan for 10years with current EMI of 32066 and interest rate of 11 per cent floating. I would like to know if I can get any good deal than this and if I can shift my loan and aswell is it good to make it fixed rate than floating rate?
Harsh Roongta answers, at 2009-12-08 14:06:53Off course you can get a much better deal if you have maintained a good track record of payment on your EMI's. Firstly check with ICICI itself. They may be willing to shift you to their new scheme on payment of some fees. This may not give you the best deal but it will still be pretty close and administratively conveneient. Else look to shift to other lenders who offer better deals. You can look up this article on my blog. After initially playing down the teaser home loan product first introduced by SBI in January 2009 , market leader HDFC has decided to join the bandwagon. They announced a similar teaser loan product on December 1, 2009. ICICI bank announced its own teaser plan on the weekend. This clearly is a good time to be a new home loan customer. So what does a teaser rate home loan mean for the Indian consumer. It means that there is a low initial interest rate that is fixed for a specified period (1 year to 5 years) and the floating rate as specified becomes applicable thereafter. Given below is an analysis of the some of the teaser rates home loans available in the market for a 20 year home loan of Rs. 30 lacs. Bank Name Initial Interest Rate Effective Interest Rate Comments Bank of Rajasthan 7.5 8.53 7.5 per cent fixed for the 1st yr, 8.5 per cent fixed for 2-3 yrs, 4th yr onwards applicable floating interest rate (currently 8.75 per cent) HDFC * 8.25 8.63 8.25 per cent fixed till 31st March 2012, thereafter prevailing floating rate (currently 8.75 per cent) Axis Bank 8 8.65 8 per cent fixed for the 1st yr after 1 yrs MRR (currently 12.25 per cent) minus 3.5 per cent = 8.75 per cent SBI 8 8.76 8 per cent fixed for 1st yr, 8.5 per cent fixed for 2-3 yrs, 4th yr onwards it is SBAR (currently 11.75 per cent) - 2.75 per cent = 9 per cent ICICI 8.25 9.00 8.25 per cent fixed for 2 years , 3rd onwards it is FRR (currently 12.75 per cent) minus 3.50 per cent = 12.75 per cent -3.50 per cent -= 9.25 per cent SBBJ 8 9.08 8 per cent fixed for 1st yr, 9 per cent fixed for 2-3 yrs, 4th yr onwards the rate is SBAR (currently 11.50 per cent) - 2 per cent =9.5 per cent Canara Bank 8 9.33 8 per cent fixed for 1st yr, 9 per cent fixed for 2-5 yrs, . above 5 yrs BPLR (currently 12.50 per cent) - 2.5 per cent = 10 per cent subject to min of 10 per cent 8.90 9.44 8.90 per cent fixed for 3 years and prevailing floating rate thereafter (currently 9.75 per cent) Source : Apnapaisa Research Bureau Effective rates have been worked out assuming the floating rates will be what they are today. *HDFC effective rate worked out assuming lower teaser rates are applicable for 24 months. HDFC and ICICI bank's dual home loan rates are now in competition with SBI's Easy Home Loan scheme which offers competitive rates at least for the first three years. Do teaser loans make more sense then regular floating rate products? Interest rates are thought to have bottomed out and are widely expected to go up next year and these teaser loans provide a cushion at least for the next few years. After teaser period is over, if your lender does not offer you market determined floating rates, you should switch your loan to another lender. The effective rate of these teaser loans are also fairly good and hence it should clearly be preferred over regular floating rate loans which might increase rates next year itself based on current market conditions. So what should a consumer look at while choosing a lender based only on teaser rates? The big variable in most cases is the applicable floating rates after the initial period of fixed rates is over. In working out the effective rates it has been assumed that the floating rates will be what they are today. This may not necessarily be true as different banks may follow different strategies on floating rates at that time. One should not forget the story of people who had gone in for a similar teaser rate home loan scheme floated by a foreign bank in October 2003 with interest rate of 6 per cent for 1st year and 6.50 per cent for 2nd year (against the then prevailing floating and fixed rates of 7 per cent and 7.50 per cent respectively) and floating rates thereafter. By the time the two year teaser period was over, the bank had lost interest in the home loan market and interest rates were jacked up to double digit levels even as the prevailing interest rates were still around 8.5 9.50 per cent. As a result a lot of consumers were forced to switch their loans to other lenders. It is in this context that the PSU banks are likely to score over their private sector counterparts. The report of the working group on Benchmark Prime Lending rate appointed by the RBI to look into introducing transparency in fixation of floating rates by the banks has remarked that " An increase in the repo rates was observed to bring about a contemporaneous change in modal BPRLs of the private sector banks and major foreign banks and a lagged response in the case of the public sector banks. A decrease in the repo rate had a significant contemporaneous impact only in the case of the public sector banks". In simple English what the group's research showed was that the PSU banks were slow to raise floating rates for existing customers when repo rates rose and were quick to drop rates for existing customers when the repo rates dropped. Off course the fixation of floating rates will hopefully be a little more transparent in the next few years but if doesnot home loan borrowers from PSU banks will hopefully not be required to make the effort to switch lenders. The other issue is that people should also look at pre-payment charges and any upfront charges (processing fees/stamp duty/legal charges, etc.). But perhaps the most important thing is the property itself. If you are buying an old property (greater than 25 years) or a resale property that has gone through many owners or an under construction property that is still in the initial stages of construction then it might be useful to consider the private lenders simply because they have developed expertise on dealing with the issues arising from such transactions. Can existing home loan consumers take advantage of these schemes? On paper all the banks (including PSU Banks) that offer these teaser products are offering it only to these new customers and not to their existing customers. So if you are an existing loan customer of any of these lenders and want to take advantage of these schemes, you should switch your loan to another lender (i.e. become a new customer to that lender). All the lenders offer the teaser rate products to existing home loan customers of other banks. Ironic but it is not available to their own customers. http://blog.apnapaisa.com/2009/12/08/icici-and-hdfc-join-the-teaser-rate-war/
IDBI asked, Helo sir, Can you let us know about prepaymnet options and when we can go about doing the same. all banks charge penalty for it.what is waiting period for it
Harsh Roongta answers, Each bank has its own rules regarding charges payable for pre-payment of loans. But quite a few banks provide for nil pre-payment charges if you pre-pay the loan from your own sources (i.e. without taking a transfer loan from another bank). The pre-payment charges normally vary between 1-3 per cent of the amount pre-paid. For details on rates and charges of more than 70 banks you can see this advanced search option on the apnapaisa website. http://www.apnaloan.com/home-loan-india/compare.html
Sarfraz asked, Hi. I have a home loan with IDBI for 20 lacs with 9.5 per cent fixed interest till 5 year.Now as other banks are giving loans at less than that interest rate,would it be wise to switch to SBI or some other bank? Pre-payment is 3 per cent of the Principle if switch to other bank.
Harsh Roongta answers, I think it will be beneficial even after taking into account the pre-payment charge. For a detailed calculation you can use this calculator. http://www.apnaloan.com/loan-advice-india/transfer-exisitng-loan-calculator.html incidentally please also talk to IDBI bank itself as they may be willing to drop the rate for you on payment of some fees.
Sanjay asked, Hi, I have an homesaver account with Standard Chartered Bank since 2005, I had taken a home loan for Rs 25 odd lacs, I have an emi of 26468/- , I have more or less completed the loan amount save 7800 though i had availed the loan for 15 years within last 4 years, What should I do now? Is it good to clear this balance of 7800 or let it remain for some time. I have in between reduced the principal by prepaying 16 odd lacs
Harsh Roongta answers, Well it wont make any significant difference when the total loan outstanding is only Rs. 7800. However if you have an intention to redraw the loan from the account and then transfer the loan to another bank it may work out to be beneficial. But then you should have some ready use for the money that you have re-drawn. My advise - forget it. You have repaid the loan. Pay off the balance amount. Only professionally savvy people should engage in borrowing at cheapwr rates and investing at higher rates. Not advisable for a lay person
sdf asked, Is is good deal to take Rs. 5.0 lakh homeloan from SBI @8 per cent for 5years?
Harsh Roongta answers, Why not. 8 per cent is a great rate and if it is fixed for 5 years than it will be great. But does SBI still offer this scheme?
Jinu asked, RBI has sent some annoucemenst regarding Pre payment of loan some time back? plz tell me when it will be mandatory for all banks?
Harsh Roongta answers, Not aware of any such announcement. There was only a speculative article in one newspaper but no definitive circular or announcement from RBI to the best of my knowledge and belief.
kiran asked, Hi.. I have a home loan for 28lacs in IDBI with interest rate of 9.75 per cent. Now I am looking at transferring the loan to other bank which gives good interest rate. Let me know best options. And also looking at top up loan in new bank for about 12 lacs.
Harsh Roongta answers, Please look up this comparison table to see which bank appears the best for your needs. As far as top up loan is concerned it will depend on the value of the property and your income. Prime facie a top up loan of Rs. 12 lacs on an outstanding loan amount of 28 lacs does appear difficult although if the property value is high enough and your income justifies the additional top up loan it should be possible to get this loan.
dash asked, There is this "MAX Gain" account with SBI and similar with HSBC which they claim will save a lot on interest. What is your take on these?
Harsh Roongta answers, SBI's Max Gain or HSBC's SmartHome (or similiar name) are essentially what are called offset loans where the money's lying in a linked current account are used to calculate the prinicpal outsanding amount and therebu the interest payment reduces. This has been explained with an example on this link. http://www.apnaloan.com/home-loan-india/homesavers.html Prsently except for SBI these accounts are priced higher by around 0.50 per cent compared to a regular home loan from the same lender. Hence for these banks it makes sense only for those people who have surplus monied lying or moving in and out in their bank account. But SBI offers it at the same rate and hence it is defintely beneficial (or at worst is the same as their regualr home loan product). SBI max gain is avaiable for loan amounts only upto Rs. 50 lacs.
tek asked, Hello Sir...i would really love to get this doubt of mine cleared from a housing loan expert line you..my doubt is "Does any bank provide loan for purchasing land / plots. If so when, at what interest rate & which banks give loans for these?
Harsh Roongta answers, Yes banks/HFC's do give loan for buying plots. However it is not availble for agricultural plots. Also they typically require that you purchase these from development corporations of the state govt. concrened or a very restricted set of pre-approved private developers. The interest rates are higher and the loan tenure is normally retsricted to 5-7 years and also the down payment erquirement is higher than a regular loan. you can use this link to see which banks offer Plot loans. go to the Plot loan tab on this page. http://www.apnaloan.com/home-loan-india/rates.html
VishnuLotlikar asked, is there a thumb rule to calculate which bank is cheaper, in terms of same interest rate and same tenure, can banks charge different amounts
Harsh Roongta answers, Minor rounding off differnece can be there but if there is a significant difference than one of the banks is not calculating the interest in a proper way.
sriicharan asked, I have a house loan of 31 lakhs with lic for 20 years.emi is 24000 per month.which is a better option to avail the maximum benefit for the customer.if i repay the loan within 7-8 years what is the profit for me.is it advantageous to close the loan within 7-8 years.Please advise.salary is above 10 lakhs per annum
Harsh Roongta answers, At Apnapaisa we encourage consumers to pre-pay their loans to the extent possible after taking into account their emergency needs as well as the surplus available for such pre-payment. For a lay person the only zero risk investment of his surplus money is in paying off his existing liabilities. So do not get into any compliacted caluclations. However should you wish to work out the details of whether you should pre-pay a loan or invest it somewhere else here is a link to a calculator that should help you in making this decision. http://www.apnaloan.com/loan-advice-india/prepay-loan-calculator.html
Nikunj asked, hi ......I am planning to opt for Home Loan around 20L for 20 yrs. Please suggest should I opt for floating or fixed rate of Interest. Also suggest pre-payment of loan levy any penalty/ extra payment? How to take care of it
Harsh Roongta answers, A million dollar question. Fisrt rememeber this is never a one time decision (even if you decide to take a fixed rate loan). You need to review your decision at least once every 6 months. Secondly a pure fixed rate (where rates remain fixed for the entire duration of the loan no matter what) are very expensive at aorund 13.75 to 14 per cent making them unviable. A good option at the current time is the partly fixed (for the first few years) and then floating options that are available in the market from almost all leading lenders now. Read this link for details on some of them http://blog.apnapaisa.com/2009/12/08/icici-and-hdfc-join-the-teaser-rate-war/ More details are available on this link. http://www.apnaloan.com/home-loan-india/compare.html
rct asked, I am planning to take 15 Lacs loan for 8 yrs Do you think it is OK. I do not want interest rate to go beyond 9.55 after 2 or 3yrs.
Harsh Roongta answers, Unforthunately nobody can control interest rates. Clearly a pure fixed rate loan where rates remian fixed for entire 8 year duration is available only at 13.75 per cent. So you have no option but to take some risk that rates will go up after the initial teaser period is over. If you want to have a fixed rate for a longer period you can consider Canara Bank which has a 5 year fixed rate period post which the rate is a floating rate subjectb a minimum of 10 per cent. Take your pick.
Perumal asked, I have taken a Housing Loan from PNB @ 10.5 per cent floating and that went upto 12.00 per cent in three months during 2008. But the current interest rates are between 8 to 9.5 per cent but still i'm paying 11 per cent as interest. Why generally the bank are increasing the interest per cent immediately if RBI announces hike. But not reducing the same when RBI reduces. Can I take any legal action against Bank
Harsh Roongta answers, Yes you can. Existing RBI regaulations require that the bank follow this practise . "In order to ensure transparency, banks should use only external or market-based rupee benchmark interest rates for pricing of their floating rate loan products. The methodology of computing the floating rates should be objective, transparent and mutually acceptable to counter parties. Banks should not offer floating rate loans linked to their own internal benchmarks or any other derived rate based on the underlying. No bank is following this practise despite the RBI regulations. You can file a complaint to the banking ombudsman about this or even file a case in the consumer courts. See this link for greater details http://www.apnaloan.com/home-loan-india/some-important-regulations.html
Prajwal asked, Hi. I have just booked a flat in Bavdhan, Pune. The total cost is Rs. 3018000. My wife and mine total net monthly salary is Rs. 55000. I have also taken a personal loan, the emi of which is around Rs. 6000. So which bank offers the best deal in my case.
Harsh Roongta answers, You should easily be able to get a 20 year loan for around Rs. 25 lacs despite the personal loan EMI that you are paying. Please visit this link for calcualting loan eligibility http://www.apnaloan.com/loan-advice-india/home-loan-eligibility-calculator.html
Reetesh asked, hello sir, i have taken a loan of 27 lacs from HDFC @ 9 per cent, can I swith over to the new scheme of HDFC i.e. 8.25 per cent fixed for 2 yrs. Will it be beneficial?
Harsh Roongta answers, As per our information HDFC does not allow the new scheme for its existing consumers. Your only option therefore is to shift your loan to another lender.
asS asked, Isnt the provision of paying upfront fees and moving to lower floating rate for existing customers unethical/illegal ? doesnt it defeat the whole purpose of floating rates ?What is RBI doing to HDFC/ICICI which are openly doing this ???
Harsh Roongta answers, I agree this is not correct. But as i answered in response to a similiar query please file a complaint to the banking ombudsman as the bank is not following existing RBI regulations.
Gautam asked, Dear Mr Harsh Roongta Please advise is this the right time to go in for a property or should i hold my dicision for another six months and observe. I am looking foe a residential appartment flat in delhi & NCR region?
Harsh Roongta answers, It is the right time if you are buying for your own residence. If it is an invetsment the answer can be evry different.
Maurya asked, I have taken home loan for purchase of Plot from LIC housing. am I able to get any Income tax benifit from this loan ???
Harsh Roongta answers, No tax benefits are available for repayment of loan taken to buy a bare plot of land.
dileep asked, My builder is not ready to negotiate the psqf rates for the flat I am interested in buying if I am going for SBI loan; however he is ready if I go to ICICI/HDFC..what's the catch?
Harsh Roongta answers, Interesting....... The only answer i can think of is : 1) ICICI and HDFC have provided him a builder loan on which normally the interest rates are high. This rate can be reduced significantly if he gives a certain number of retail borrowers to them. Thus builders save on the interest payable part of which they can pass on to the consumer as a reduction in rates. 2)Simliarly the builder may be getting a fee for referring cases to ICICI or HDFC again part fo which he can pass back to the consumer as reduction in rates. However this fee is not very large and hence the first reason is likely to be the more possible explanation.
Harsh Roongta says, Ok friends .. Hopefully you found this as interesting as i did. Please read the chat transcript as questions similiar to yours may already have been answered. For any other questions do log on to www.apnapaisa.com . you can also visit my blog on http://blog.apnapaisa.com/author/harshroongta/ or follow me on twitter http://twitter.com/harshroongta