The sharp rise in home loan rates of private sector banks is forcing their customers to switch loyalties. The customers are shifting their home loan accounts to public sector banks, which have been less aggressive in raising the rates.

The interest rate differentials between the private and public sector banks have become stark in the last few months. The private sector banks jacked up the rates by over 2 percentage points, while the public sector banks increased the rates by only 100-125 basis points since February 2007.

If the interest rate increases in the last one year are considered, the private sector banks' floating home loan rates have risen by 4 percentage points and that of public sector banks by 2 percentage points.

Bankers said customers are willing to bear the prepayment charge which ranges anywhere between 0.5 and 2.5 per cent of the outstanding loan amount and shift to public sector banks.

Home loan borrowers are also opting for the government-owned banks because of fears that private sector banks would promptly pass on any further interest rate hikes. The public sector banks are bound by the finance ministry's directives to spare smaller borrowers.

Banks such as Corporation Bank [Get Quote], Punjab National Bank [Get Quote], Bank of Baroda [Get Quote], Union Bank of India [Get Quote] and Indian Bank [Get Quote] have seen customers moving their home loan accounts from private sector banks in the last two to three months.

K L Gopalkrishnan, executive director, Corporation Bank, said, "We have seen some instances of home loan borrowers moving away from private banks. These are relatively fresh loans, which have been disbursed about two years ago."

Last year, private sector banks led by ICICI Bank [Get Quote] raised their home loan rates by as much as 4 per cent, while their public sector counterparts hiked the rates by up to 2 per cent.

Select public sector banks had spared the existing home loan customers from an increase in the interest rates. The home loan rates offered by public sector banks range between 9 and 11.5 per cent, while private sector banks are charging around 12 per cent.

In case of a shift in the loan account, the public sector bank takes over the liability from the private sector bank. The bank acquiring the loan does not levy any processing fee. The outstanding loan amount is paid directly by the acquiring bank to the private sector bank.

For the bank, this means acquiring a new customer who gets the benefit of lower interest rates and lower monthly-equated instalments.

"We are receiving enquiries for shifting of loan accounts. However, when we receive such requests, we compare our rates and see if there is any differential and then accept the proposal," said a senior Bank of Baroda official.

According to a senior banker, even if the interest rate differential is one per cent, it makes sense for a customer to shift as every hike of 1 percentage point increases the individual's EMI outgo by more than five per cent.