Tag: home loan EMI

Are festive home loan offers worth it?

Personal Finance

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With stamp duty cuts by several state governments adding to the allure of benign property prices, the time seems ripe to buy your dream home. Home buyers also stand to benefit from the prevailing low interest rates on retail loans, that peg up the affordability of home purchases. Despite the status quo adopted by the RBI on policy rates, interest rates on home loans have dropped by 10-120 basis points (bps) since the start of the year, across lenders. To top it up, some banks and HFCs (housing finance companies) are offering limited period offers in the form of further rate cuts and processing fee waivers to cheer up home buyers this festive season.

However, borrowers should keep in mind that these offers pertain to floating rate loans. These rate are likely to be revised upwards during the tenure of the loan, more so, since we are already at the bottom end of the rate cycle. Hence, however enticing the interest rates may seem, the decision to take on debt must be taken with utmost caution, after considering the payouts that you will have to make during the 20-30 year loan tenure.

Here’s a lowdown on some of the festive home loan offers.

Special rates

Kotak Mahindra Bank now offers home loans starting from 6.5 per cent per annum for loans sanctioned and disbursed between September 10 and November 8, 2021. This is the lowest rate on offer in the market currently. However, the right way to compare offers from different lenders would be after considering everything – the rates, processing fees and other charges applicable on a case to case basis. The interest rates are offered according to one’s credit score and income profile.

Kotak’s offer, however, translates into only a 10 bps savings over the bank’s existing interest rates for borrowers with the best credit profile. Let’s bring in some perspective. For example, for every ₹10 lakh of home loan availed during the offer period (say for a 30-year tenure), borrowers can save only ₹790 in their EMIs every year. This offer is valid on all loan products (balance transfer, fresh home loans, etc.) and the interest rate is linked to the credit profile of the borrower.

HDFC has also slashed its interest rates by 10 bps for floating rate home loans sanctioned and disbursed (either partially or fully) until October 31, 2021. Customers with a credit score of over 800 can avail home loans at the rate of 6.7 per cent per annum, irrespective of the type of customer (salaried or otherwise) and the amount of loan availed. Earlier, the HFC offered home loans at 6.8 per cent to 7.3 per cent per annum for loans of up to ₹30 lakh and at 7.05 per cent to 7.55 per cent, for loans over ₹30 lakh but less than ₹75 lakh. For loans above ₹75 lakh, interest was charged up to 7.65 per cent. The HFC, however, offers its women home buyers a discount of at least 5bps on the prevailing interest rate, which can now not be clubbed with the limited period festive offer.

LIC housing finance, another leading HFC has followed suit and now offers home loans up to ₹2 crore at interest rates starting from 6.66 per cent to borrowers having a CIBIL score of 700 and more, irrespective of whether they are salaried or professionals/self-employed. This deal however benefits customers with higher ticket sizes only. This is because until now, the company was already offering interest rates starting from 6.66 per cent on its home loans of up to ₹50 lakh. For higher amounts, the HFC was offering loans at 6.9 to 7.9 per cent per annum.

The offer translates into savings of ₹13,417 (on your annual EMI payments), for customer who borrow ₹70 lakh during the offer period for a tenure of 30 years. The offer is available for home loans sanctioned from September 22 to November 30, 2021, provided the first disbursement is availed on or before December 31, 2021.

The country’s largest lender, SBI too has slashed its rates by up to 45 bps (concessions based on credit score of the borrower) during the offer period. Earlier, the bank offered loans at the rate of 6.7 to 7.3 per cent for loans up to ₹75 lakh and in the range of 6.95 to 7.4 per cent for loans over ₹75 lakh. Now, during the offer period, SBI offers home loans at 6.7 per cent, irrespective of the loan amount.

While 6.7 per cent might not be the best rate offered, the festive offers of SBI do mean substantial savings for customers when compared to the rates offered by the bank hitherto. For a borrower availing a home loan of ₹75 lakh for a tenure of, say 30 years, this would translate to a saving of ₹27,000 on EMI payments on an annual basis. Besides, for non-salaried borrowers, this offer period could mean an additional saving of 15 bps on the annual rate of interest charged.

Fee waivers

Besides lower rates, many banks and HFCs are also offering waivers on processing fees. LIC Housing finance, for instance, has capped its processing fee at a maximum of ₹10,000 or 0.25 per cent of the loan amount, whichever is lower for loans up to ₹2 crore. Outside of the offer period, the HFC charged a fee in the range of 0.25 to 0.5 per cent of the loan amount. The maximum fee charged was pegged at ₹15,000 for loans up to ₹1 crore and up to ₹50,000, for loans in the range of ₹1 crore to 3 crore.

HDFC too has slashed its processing fee to ₹3,000 for customers who are salaried and self -employed professionals, and to ₹5,000 for self-employed non-professionals, from the earlier ₹10,000. SBI also is offering a complete waiver on its processing fee for home loan buyers, during the offer period.

Bank of Baroda is also offering a 25 bps cut in the interest rates charged on its Baroda Home Loans, along with a 100 per cent waiver in processing fee for loans availed until December 31, 2021.

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Can switching home loan ease your EMI burden?

Personal Finance

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Is your big-ticket home loan pinching you in this time of crisis? While continuing to pay your EMIs is advisable (rather than opting for the moratorium), it may be time to review your existing home loan to see if you can lower your monthly payout.

In its monetary policy last week, the Reserve Bank of India (RBI) held its key policy repo rate at 4 per cent.

But that doesn’t matter.

A look at data across banks suggests that even now there is a wide difference between the lending rates on home loans linked to MCLR (marginal cost of funds-based lending rate) and that on those benchmarked against RBI’s repo rate.

In many cases, the difference is 30-50 bps within the same bank, which amounts to a sizeable difference in interest over the tenure of the home loan.

Basics

Home loans are broadly of two types — fixed and floating. Generally, fixed-rate home loans charge a substantially higher interest rate. Hence, it may be advisable to opt for floating-rate loans, particularly in a falling-rate scenario.

Now, under floating-rate loans, lending rates change depending on the interest-rate movements in the broader economy. Earlier (from April 2016), home loans were linked to a bank-specific benchmark — MCLR.

Here, while a repo-rate cut by the RBI leads to banks lowering their MCLR, it happens with a lag and varies widely across banks.

Also, generally, home loans are benchmarked against one-year MCLR and, hence, lending rates are reset only once every year. So, even when banks cut MCLR, the benefit of it is transmitted to borrowers only when the loans are reset.

To address these issues, the RBI had mandated banks to introduce repo-linked loans from October last year. Here, if the RBI cuts the repo rate, it gets reflected on your lending rates much faster (banks have to reset their repo-based benchmark rates at least once in three months).

This is a key reason why lending rates on repo-linked home loans are much cheaper than those on MCLR-linked loans within your own bank.

Effective rates matter

While comparing rates, the final effective lending rate is what matters and not the repo-linked benchmark. This is because banks charge a spread over the repo-linked benchmark rate to arrive at the final loan rate. For instance, at SBI, the repo-linked benchmark rate (EBR) is currently at 6.65 per cent.

For a ₹30-75-lakh loan, a spread of 60 bps (for salaried borrower) is charged on it, taking the effective lending rate to 7.25 per cent. At ICICI Bank, the repo-linked rate is currently 4 per cent, over which the bank charges a 3.2 per cent spread, taking the effective lending rate to 7.2 per cent.

Hence, while comparing rates to switch, you need to look at the final loan rate, including the spread, under both repo- and MCLR-linked loans.

Next, some banks also offer special rates for good borrowers with sound credit scores. For instance, at PNB, while the spread charged over the benchmark is 50 bps in case of a borrower with credit score of 750 and above, it is higher at 75-85 bps for those with a lower score. In the case of Bank of India, you can get loan at an attractive 6.85 per cent if you have a high credit score.

Once you have noted the underlying benchmark, the spread and the concession (if any), that determine the final lending rate, the next step is to do the maths.

Tidy savings?

Your decision to switch will broadly depend on three factors — difference in lending rates, remaining tenure of loan and outstanding loan amount.

Your savings by way of interest on the entire tenure (residual) of the loan will be the highest when all three are on the upper side — a wide difference between existing and new lending rates (under repo-linked), long residual tenure of loan and huge outstanding loan amount.

The accompanying table shows that if you have a home loan outstanding of ₹55 lakh and the remaining tenure is 23 years, sizeable savings kick in when the difference in lending rates is 50 bps (or over).

In such a case, you can straightaway make the move. But if the difference in lending rates is only 10 bps, the savings shrink substantially to about ₹1 lakh over the tenure of the loan.

While this is still notable, you may still want to weigh other charges before making the switch. For instance, if you are making the switch within the same bank, you may have to pay a one-time administrative fee.

For example, Bank of India charges an additional 0.10 per cent over normal lending rate if you intend to switch over from MCLR- to repo-linked loans, according to the bank’s website.

In case you are switching between banks, there may be a processing fee involved, which could be a percentage of loan amount (can go up to 2 per cent, subject to a minimum amount). Also, amid the ongoing restrictions owing to the Covid-19 pandemic, switching between banks may be procedurally tedious.

In any case, if you have a small loan outstanding and a short tenure remaining, it may not make sense for you to switch, even if the lending rates are widely different (see table). For instance, in the case of a ₹5-lakh outstanding amount with a residual tenure of four years, the savings will be quite low.

The other factor to take into account is that given that rates have fallen sharply over the past two years, a rate hike in the next two years could pinch you more under the repo-linked loans.

This is because lending rates can move up sharply and quickly. That is all the more reason for you to avoid making the switch if you have a short tenure of loan left.

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