Time to upgrade home loan terms

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By Dr Sanjay Murari Chaturvedi

Home loan borrowers are shifting loans from private sector mortgage lenders to Public Sector Banks (PSBs) to take advantage of the wide difference between the interest rates for existing borrowers of private lenders and new borrowers of PSBs, according to PSB banker.

A private bank customer took a Rs 35 lakh home loan two years ago and now owes a principal amount of Rs 30 lakh, after paying EMIs and making part pre-payments. He is now shifting his loan to the State Bank of India (SBI), the country’s largest bank.

At the current rate of 12.75%, he is paying an EMI of Rs 36,049 to the private bank, but SBI will charge him only Rs 26,948 as EMI at a rate of 8%.

Assuming the rates offered by the two banks do not change for a year, the customer pays Rs 1.09 lakh less as EMIs in a year. After accounting for transfer charges and processing fee, which is around Rs 75,000, the customer still saves Rs 34,000 in one year.

A customer has to usually pay 2% of the outstanding principal as pre-payment charges to his existing lender and around 0.5% as processing fee to the new lender.

“Low interest rates in public sector banks are stimulating demand and luring both new and existing customers. We have seen a surge in the number of queries from existing customers of private sector banks wanting to shift their loan portfolio to us,” said Corporation Bank chairman JM Garg, adding the trend has emerged in the past one month. Corporation Bank offers home loans at 8.5-10.5%.

Private banks have been loath to lowering mortgage rates, despite a series of key policy rate cuts by the Reserve Bank of India. State-owned banks, such as SBI and Punjab National Bank (PNB), have significantly cut rates, bringing down home loan cost.

Recently, SBI introduced an 8% home loan rate offer, valid for a year, for new borrowers. Existing home loan borrower shifting from another lender to SBI would also be treated as a new borrower, and thus avail the lower rate of interest.

While all banks are offering lower rates for new loans, rates for existing borrowers have dropped only marginally despite RBI cutting repo rate by 250 basis points in the past four months to 5.5%.

Private sector lenders have been even more slow in reducing rates for their existing customers. “People who have availed home loans from private banks are now beginning to feel the pinch, as the gap between interest rates in public and private banks has widened,” said a senior executive with PNB Housing.

There is no concrete data on how many such loans have actually been shifted from one bank to another, but banks said enquiries have risen sharply in the past few weeks.

Apart from monetary gains, another reason why customers are looking to shift loans is the way private banks have reacted to the changes in the rate regime over the past few years.

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