Banks sweeten deal for existing home loan customers

New borrowers to pay higher interest than existing ones, as spread for new home loans has been increased.

If you had taken a home loan from State Bank of India (SBI) or ICICI Bank six months ago, you will have to pay lower interest than new customers.

Though SBI cut its base rate by 40 basis points (bps) to 9.3 per cent, the spread for new home loans has been increased from five bps to 25 bps.

This means someone who took a loan in the past six months will pay interest of 9.35 per cent, new borrowers will pay 9.55 per cent.

Similarly, ICICI Bank reduced its base rate by 35 bps to 9.35 per cent but increased the spread for home loans, making these expensive for new borrowers by 10 bps.

This difference depends when a customer had taken a loan, as spreads keep changing. In 2011, for instance, SBI’s home loan rate was 1.25 per cent over the base rate.

“Earlier in the year, we passed almost the entire margin to customers, keeping home loan rates very close to the base rate. This meant the bank couldn’t change rates any further till the base rate fell. This time, we have left some cushion. If the bank wants to further relax interest rates at a later date, there will be room. Even at the current spread, SBI is the cheapest in the market,” says Jayanthi Lakshmi, chief general manager, (real estate, habitat & housing development), SBI. 

If a new customer takes a home loan of Rs 50 lakh from SBI for 20 years at an interest rate of 9.55 per cent, equated monthly instalments (EMIs) will be Rs 46,770.

The overall interest payable during the tenure of the loan will be Rs 62.25 lakh. A borrower who took the same loan a month ago will pay an EMI of Rs 46,118.

The total interest payable will be Rs 60.68 lakh. Though the monthly difference works out to only Rs 652, the difference in the interest through 20 years falls by Rs 1.57 lakh.

“This is done to avoid old customers shifting their loans to other lenders. At the same time, they have also preserved their margins by keeping the new rates well above the base rate,” says Vineet Jain, founder and chief executive of LoanStreet.in.

However, new customers needn’t worry. When interest rates fall further, almost all lenders allow customers to switch to the new interest rate regime by paying a fee; this is termed resetting a loan.

In case of SBI and ICICI Bank, the fee is 0.57 per cent of the loan amount. As such, for a loan of Rs 50 lakh, this will work out to Rs 28,500.

Experts say this isn’t the best time to transfer loans to lower your outgo or reduce the tenure. “At present, all leading lenders have an interest rate of 9.55-9.65 per cent,” says Jain. 

He adds for a balance transfer, the difference between rates should be at least 50 bps, provided the tenure left is around 10 years to have any financial benefit.

Those doing balance transfer at present are the ones who are unhappy with their current lenders due to deficiency of service or inconvenience.