Tuesday, December 8, 2009

India - Which is The Cheapest Loan Offer?

. Tuesday, December 8, 2009

By Vidyalaxmi

The home loan rate war just got hotter with ICICI Bank joining the bandwagon. Most lenders are now offering a combination of fixed and floating rates. This definitely comes as a relief at a time when most bankers are speculating an interest rate hike early next year. With a plethora of offers on cards, how do you identify the best option? Here’s help from Vidyalaxmi.

Which is the cheapest loan offer?
This is a tricky question as one should not arrive at an answer by merely looking at the interest rate. Kotak has different floating rate products — for salaried customers between 7.99 per cent and 8.25 per cent while for businessmen, it is 8.5 per cent. It also charges a processing fee — for salaried customers it is 0.25 per cent or Rs 10,000, whichever is higher and for businessmen it is 0.5 per cent.

These schemes are very similar to each other and the difference in weighted average is in the range of 0.25-0.3 per cent for these loans at teaser rates. For a Rs 30-lakh home loan offered by HDFC and ICICI Bank for 20 years, the EMI works to almost Rs 25,562 for the first two years. On the other hand, a SBI Easy Loan customer would have to pay an EMI of Rs 25,093 for the first year and Rs 26,035 for the next two years. If you compare HDFC and SBI, the difference is marginal.

The Reserve Bank of India (RBI) had created a working group to study the responsiveness of banks’ prime lending rates (PLR) to the repo rate. The research mentioned that PSBs were more proactive in dropping rates but not in hiking the interest rates compared to its private banking peers. A borrower can get a fair idea by looking at the historic PLR data.

In the period February 2006-May 2009, HDFC had changed PLR 13 times, out of which the PLR was lowered four times. In the same period, SBI and ICICI have changed their PLR 11 times. SBI had lowered the PLR thrice and ICICI Bank lowered the PLR twice in the same period. But some of the recent festive home loans offer discounted rates without any changes to the prime lending rate. Also, look at all costs such as such as the processing fee, legal charges, and prepayment penalty before making a decision.

But don’t fix on your home lender without finalising the property. “It is very difficult for borrowers to get a home loan from public sector banks if they choose a resale property as old as 15-25 years, which has exchanged 2-3 hands in the past. They are also shy to lend for under construction properties if they are not listed with any of the banks for pre-approved loans,” Mr Roongta added.

Rate wars have been prevalent in the country. In fact, a foreign bank had slashed rates to six per cent in 2003 for the first year, 6.5 per cent to the second year and floating rates from the third year when most banks were offering a floating rate of seven per cent then.

But after the third year, the customer has to pay a significant premium of over two per cent for having locked into that offer.

This would be a big risk for the customer as no one is aware where the rates would be headed in 2-3 years from now.

In fact, the effective rates in the table have been worked out on the basis of existing floating rates.

Even as new customers are speculating to bite the bait, old customers have got a raw deal. In most cases, customers don’t have a choice to switch to the new loan.

If they are allowed, it comes at an additional cost. Says a senior official of ICICI Bank, all existing customers can shift to the new fixed-floating rate loan and charges would be 1.75 per cent of the outstanding loan amount.

Kamlesh Rao, EVP — Mortgages, Kotak Mahindra Bank adds: “If the fixed rate offers continue to be offered post January 31, we will look at the option for our existing customers also to get into this offer. The switching charges would be 0.5-1 per cent.”

Disclosure: stockOzone does not own any of the stocks discussed here.

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