Borrowers switch home loans to beat high rates
Interest rates may not have fallen significantly this year, but home-loan borrowers are beating high rates by shifting their loans to cheaper lenders. Sachin Kumar reports.india Updated: Oct 18, 2012 21:01 IST
Interest rates may not have fallen significantly this year, but home-loan borrowers are beating high rates by shifting their loans to cheaper lenders.
This is often called balance transfer or loan take-over from one bank to another.
With continuous hikes in the interest rate by banks in the last two years, old home loan borrowers have seen rates hovering around 14.5%. This differential in new and old home loan rates is what is prompting old borrowers to switch home loans.
India's largest bank, State Bank of India, which is offering up to R30 lakh home loans to new customers at an industry-low rate of 10%, has taken over loans worth R300 crore in the last one-and-a-half months.
After recent cuts, most banks are offering floating rate home loans at 10% to 11%. SBI has cut interest rates on home loans twice this year since August.
Experts say that balance transfer is beneficial for a customer only if the differential in the rate of interest is more than 1%. "Customers should think of balance transfer only if the difference in current home loan rate and new home loan rate is more than 1%," said Vipul Patel, director, Home Loan Advisors.
"We have seen customers taking interest in balance transfers," said Vara Prasad, general manager, Union Bank of India. "Now, there is no prepayment penalty on prepaying home loans, which is encouraging people to switch home loans."
Banks used to earlier charge prepayment penalty of 1-2% of the outstanding loans, which was ended on an RBI directive earlier this year.