Still paying a high home loan EMI? Switch banks

Have you been receiving text messages from banks lately offering you cheaper loans?

These unwanted SMSes seem to be the early signs of a “rate war” building up as banks jostle against each other to wean customers away from competitors.

For millions of home loan borrowers, who have been paying large chunks of their income every month towards repaying housing loans, there is something to cheer about.

Or so it appears.

Sample this: Shouvik Sen (name changed), 45, working with a multinational firm in Guragon had taken a home loan of Rs 75 lakh five years ago from a private bank for which he has been paying an interest rate of 10.25 %. He recently received a call from another bank offering him an interest rate of 9.75%.

Not just that, the bank also offered to do all the ground work required to “foreclose” — banking jargon for paying off a loan ahead of its tenure — free of cost.

The offer: pay off the existing loan by switching to a different bank at lower rates and lower equated monthly installments (EMIs).
Several lenders, including the State Bank of India (SBI), have waived off the processing fee for all those customers switching from other banks or housing finance companies.

For existing borrowers, however, there could be a fine-print hiding in the details.

Some banks are bundling the offer for lower EMIs with longer loan repayment tenure. While lower EMIs is an attractive option, the borrower can end up paying significantly more as interest as repayment will spread over more years than the original plan.

The “rate war” comes two months after Reserve Bank governor Raghuram Rajan told banks in no uncertain terms to start reducing interest rates to pass on two previous cuts to customers.

In April, hours after Rajan’s strong remarks, SBI, ICICI Bank and HDFC Bank announced cuts in their “base rate” — the floor rate to which all lending rates are linked — rekindling the hopes of lower EMIs. Banks have since announced another round of “base rate” cuts after the RBI cut its key lending rate earlier this month.

“HDFC follows a three-month reset cycle for its floating rate loans both either on the way up or down,” said a spokesperson at HDFC.
Some banks offer existing customers the option of keeping the EMIs unchanged, but reduces the tenure.

Smita Gupta (name changed) took a home loan of `23 lakh from a housing finance company. She complained that there has been no change in her EMI and that the focus is more on acquiring new customers.

“While the benefits of a lower interest rate is extended first and foremost to the existing customers, they often do not see it as banks, to keep the EMI steady, reduces the tenure,” Jairam Sridharan, president, retail lending and payments, Axis Bank told HT.

Leave a Reply