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India's biggest mortgage player HDFC recently announced a cut in floating home loan rates by 0.5 per cent. The catch, however, is that only new borrowers will get the benefit of this scheme which will be reviewed again on October 31.
If you are an existing borrower do you feel cheated when your lender does this? Don't all banks do the same? What should you do then?
If you are an existing borrower then should you shift to a new borrower? If you want to take a new loan then how should you use this scenario to your advantage?
In a chat with Get Ahead readers on September 26, home loan expert Harsh Roongta answered these and several other queries related to home loans, both floating and fixed.
For those of you who missed the chat, here is the transcript.
Ganesan asked, When can we expect a rate cut for existing borrowers of ICICI bank? Don't you think that the bank is making more money by just calling new borrowers for a competitive rate and following with steep increase in rate hike?Will RBI regulate this increase and Decrease?
Harsh Roongta answers, This question has been repeated in various forms in the questions asked so far. Unfortunately in India the floating rate loans are not dependent on an objectively determined external interest rate such as MIBOR or the CRISIL bond yield index. Everywhere else in the world this would be so. So in India we have the spectacle of reduced rates being available only to new consumers and not to existing consumers.
An analogy (though politically incorrect) is about how males treat their wives and girl friends. Dutiful wives (read existing consumers) are made to suffer while the girlfriends (read new consumers) are offered attractive terms.
Almost all banks have been guilty of this including public sector ones. This is best exemplified by what happened in 2002 and 2003 when the interest rates dropped like a stone. I am not aware of a single bank that offered the cuts to all its existing consumers as qucikly as they were offered to their new consumers. So can anything be done by the existing consumers.
Of course. They should stop being the long suffering wives and threaten to move to a new man (read another bank) which is when your husband (existing bank) will rush to give you the same terms provided you have been a good wife(ie you have paid your installments on time). You can read this article to get more tips: http://www.apnaloan.com/articles/home-loan-india/On_wives_and_girl_friends.html.
venkateswaran asked, how do existing loan customers take advantage of the rate cut without shifting banks? Please advise.
Harsh Roongta answers, Unless you threaten to shift banks (assuming you are in a position to do so as you have maintained an impeccable track record of payment) you are unlikely to get this benefit. In many cases you can get the benefit if you actually shift banks.
mitul asked, I'd SANCTIONED the loan from ICICI before a year by paying Rs 5500 as processing fees but then was never able to disburse it as we didn't find a suitable house. Can I get back the processing fees?
Harsh Roongta answers, Normally most processing fees are non refundable and this fact is mentioned in the sanction letter. However you can try and obtain some refund at least (the bank incurs a credit processing and sales charge for your case) a portion of your processing fees. This will however be on request basis.
grbbabu asked, Hi Harsh, Good afternoon. Let us assume that i have taken special floating rate of 10.5% with HDFC, and in the near future if the government hikes the PLR then new customers will have to pay the same floating interest rate as the old customers or the hiked percentage will be paid by the new customers?
Harsh Roongta answers, Unlike reduction in rates increases apply to all consumers -- new or existing. There is only one instance that i can think of where a bank increased rates for new consumers without increasing it for existing consumers.
ashwini asked, i want to buy a flat by taking home loan. and i am a govt. employee i had service upto 32yrs. i want to keep the home loan EMI deduction till i complete my service whether such type of facility of keeping EMI deduction til retirement is there or not? or what is the max. tenure?
Harsh Roongta answers, Normally most banks provide tenures upto 20 years though some banks do have a 25 year tenure.
Hari asked, Hi Harsh, Please advice which type of home loan is a better choice for a new home loan borrower. Fixed rate or Floating Rate? how do you see home loan rates moving in the near future (6 months to 1 year).
Harsh Roongta answers, This is an evergreen question. Firstly this is not a one time decision. please reveiw whatever desicion you take at least once in 6 months Currently the gap between genuine fixed rate loans and floating rate loans is at least 2.5%. Apnaloan's advise to its consumers is to go in for a floating arte loan in the current scenario.
shesha asked, When can we expect a cut in other banks interest rates? My loan is taken from STATE BANK OF MYSORE.
Harsh Roongta answers, To assume that another bank will cut rates just because one bank does is not correct. there are several factors that will determine this not the least of which is its existing interest rate, its cost of funds and its appetite for writing new loans.
sachin1 asked, Hi Harsh I have taken home loan from HFC with following current details FRR/PLR (%): 12.75 Variance: -2.25 Interest Rate (% p.a): 10.5. My Question is if the interest rate cut take place in future for existing customer, will the HFC reduces PLR only or will it reduce both PLR and Variance?
Harsh Roongta answers, This question only banks can answer. But the trend in the past has not been encouraging with most banks resorting to increase the variance rather than the PLR/FRR (thus denying the benfit to the existing consumers). However this is likley to invite regulatory scrutiny and we should expect some action from the regulator in this regard.
prasad asked, Dear Sir I Prasad Hyderabad, I was taken home loan (plat + house construction) at IDBI bank. Bank as given 50% loan and 2 year time, but I am not construction house because of some personnel reasons. After 18th month EMI is started and I am paying track record also fine. Now I am plan to construction house after five year later in mean time loan was completed. Any problem in future (rate of interest increasing or default interest rate use or any think?
Harsh Roongta answers, My understanding is that you have completed paying off the loan amount. If you have not the bank may well be within its right (subject to this right being available to them under the loan agreement signed by you with them) to charge higher rate of interest by treating this as a plot loan (rather than a self construction loan) which normally carries a higher rate of interest.
IndraNeel asked, Why can't the RBI restrict all the banks to decrease/increase the Loan Rate at one time? Why is it that banks increase or decrease the interest rate at their will?
Harsh Roongta answers, It is about time that all consumers should stop looking to the mai baap sarkar (or regulator). Nothing stops us as consumers to take proactive steps and threaten to shift our business to a competitor. Threat of competition is far more effective than any regulation to ensure that you get a good deal. If you are apathetic to your rights as a consumer no regulation can get you your rights. This is of course not to say that this should not be regulated but the fact that the consumers should stop being so dependent on the government or the regulator in this regard.
gajendra asked, can i fight with the bank to raise home loan tenure and not EMI because bank is saying that they cannot expand the tenure
Harsh Roongta answers, If you read the home loan agreement you will find that the bank has a right to increase the EMI or the Tenure at its option. There is also economic justification for this to some extent since incraese in tenure could possibly make the loan last beyond the retirement age of a consumer.
Shravan asked, Hello Harsh, I have taken a home loan with ICICI at 11% floating rate. I understand that Indian Bank offers loan at lesser floating rate (@9.5%). Now, if I pre-close my account with ICICI I am aware that I should pay a penalty of 2% of outstanding amount. However, upon calculating I see that I will compensate the penalty by still moving to Indian Bank, in fairly 9 months' time. Only the risk will be if Indian Bank were to increase its floating rate to 11% immediately. Can you please advise if such a drastic increase in interest rate is possible in public sector banks like Indian Bank?
Harsh Roongta answers, Your calculations are correct. Just a word of caution though. Get sanction from the new bank after showing the photocopies of all the title documents that you have. Also make sure that you will be able to get the NOC in the format required by the new bank. Once these things are true please go ahead. As to whether the new bank will also hike rates immediately it looks improbable though only the future can tell.
susheel asked, I had taken a loan from HDFC, what is the procedure to change the Bank, mean what is the formalaties i had to do for that?
Harsh Roongta answers, Get all your icnome documents and photocopies of all your title documents and get a sanction from a new bank for the switch. You will probably need to pay a fee for that. Once this is through you can approach your existing bank to issue a letter for the total amount outstanding and the title documents held by them as security. Chances are that when you make this request the existing bank itself will reduce your interest rate. If not based on this letter your new bank will payoff the existing bank.
jason gilespie asked, Hi Harsha, Most of the banks lure the customers with low floating interest rates and within months increase the interest considerably. How can we avoid these tricks? Is there any legal way? May be which we can use during taking the loan? You have any advice regarding the best bank to take a home loan which doesn't do these tricks?
Harsh Roongta answers, This has already been answered. Unfortunately there is no legal way curently except being aware and vigilant. Be aware of what interest rate your existing bank is offering to the new consumers and threaten to switch if this is not made available to you. Even if regulation comes in tomorrow this will still remain true.
Vijeye asked, what about foreclosure charges. My bank charges 2% of outstranding loan as foreclosing charges. have the rates gone down so much that we need to shift the bank Currently iam on 9.2% floating rate with Andhra bank
Harsh Roongta answers, If you are on 9.2% floating arte dont even think of shifting. just stay put.
murty asked, hi harsh, I haven't taken any loan so far, and my plan is to invest around Rs 15-20 thousand per month after paying a tax of Rs 4,000 per month and paying a rent of Rs 5,000 per month. Is the present status is OK or should I go for a house loan, and reduce my savings in MFs etc?
Harsh Roongta answers, It is impossible to give advise based on these facts. Your needs, risk profile will need to be studied before advising on this. However as a thumb rule it always makes sense to buy your own house if you have a stable intent in one city.
SUNNY asked, HI I M WORKING IN UK AND I M AN INDIAN CITIZEN BASICALLY CAN I APPLY A LOAN FOR PURCHASING A PROPERTY IN UK, IF YES WAT SORT OF DOCUMENTS WILL BE REQUIRED?
Harsh Roongta answers, No bank in India will give you a loan for buying a property in the UK.
kkhan asked, prepaying the home loan and moving to a new bank is this good in long term since the person will be paying more?
Harsh Roongta answers, as long as the new EMI is lower it will obviously be good.
Adis asked, I have taken loan from HDFC at 11.25 RPLR is 14% and spread is 2.75. At the same time I have friends who have taken loan with spread of 3. Now if the rates come down then will this difference of Spread bridged?
Harsh Roongta answers, no.
ll asked, My bank charges 2% of outstanding loan as foreclosing charges. have the rates gone down so much that we need to shift the bank Currently i am on 11% floating rate with SBI.
Harsh Roongta answers, If your repayment track record is impeccable then you should be able to get an interst rate of 10.5% which will make it worthwhile for you to shift even after paying foreclosure charges of 2%. However the very act of threatening to shift (after getting a credible offer from another bank) should normally be enough to get you the benefit of the new rate.
Rakesh Raina asked, Hi Harsh -- thanks I think your trick worked. I just called my bank and that I ant to move the exising loan to another bank. They are ready to rethink on my current intrest reate and will get back to me in 4-5 working days.
Harsh Roongta answers, Thanks. Apnaloan takes pride in assisting consumers to get best deals.
raghvi asked, Hello Harsh sir, considering the current property prices, which will give more return: Takign Rs 25 lakhs loan and paying Rs 30K EMI for 15 years or investign Rs 30K SIP in diversified Mutual Fund for 15 Years?
Harsh Roongta answers, You are comparing apples and oranges.
sudhir asked, Dear Harsh, does the bank consider super-built up or only built-up while giving the loan?
Harsh Roongta answers, Banks only get it valued by its own set of valuers. Normally the valuers will follow market practise and value based on whatever is prevalent for that area.
manjunatha asked, hi harsh,can we get tax benefits for both Site + construction loan or only for construction part?
Harsh Roongta answers, For both but only after the construction is comepleted .
guttalanand asked, Hi, I see that ratio of interest and principal in EMI will be different from bank to bank. Some bank will recover most of the interest in very short period and hence no benefit of repaying. Is there any clause on this from RBI? Thanks, Anand Guttal.
Harsh Roongta answers, This charge against the banks appear to be incorrect. I am not aware of any major bank which uses incorrect accounting to break up the interest and principal compenents of EMI. You can check out any bank's break up by using this calculator on Apnaloan. http://www.apnaloan.com/loan-advice-india/amortisation.html.
somnath asked, Dear Sir, Can we go with both floating and fixed rate of interest with new bank on the same loan?
Harsh Roongta answers, Some banks offer this facility. I am not a fan of such a facility and would advise you (in current cirsumstances) to stick to floating rate loans (as long as you reveiw your desicion every 6 months).
Harsh Roongta says, Ok Folks. I hope this has been useful for you. Please read the chat transcripts as most questions ahve already been answered. You can also login to www.apnaloan.com for any further queries or doubts.
Harsh Roongta is the CEO of apnaloan.com, an online guide for retail loan seekers. Apnaloan also enables loan consumers get best rates by making banks compete for their loan.