should you shift?

Like all home loan borrowers,the last two years have been difficult and filled with uncertainty for the Sinha family. Sanjiv Kumar Sinha,38,is a corporate professional based in Noida.....

Written by Suneeti Ahuja | Published: February 23, 2009 2:24:36 am

Like all home loan borrowers,the last two years have been difficult and filled with uncertainty for the Sinha family. Sanjiv Kumar Sinha,38,is a corporate professional based in Noida. To realise his long-cherished dream of a house in one of Delhi’s suburbs,Sinha took a home loan of Rs 8 lakh from a private bank in 2005. However,the joy of owning a house proved short-lived as rising interest rates drove his EMI and loan tenure upward during the last four years.

Ensnared by a low rate of 7.5 per cent,Sinha opted for a floating,rather than a fixed rate of interest (the latter was then available for about 9.5-10 per cent) — a decision he repents to this day. “During the last four years home loan rates have played havoc with my household budget,” he says.

What he finds especially galling is that while both his EMI and loan tenure have gone up,the principal outstanding remains high. “In the last four years,as my home loan rate rose from 7.5 to 11.75 per cent my EMI rose by as much as Rs 2,000. Though I have paid EMI for almost four years,I still have to pay for the next 18 years (the original loan tenure was 20 years). And the principal outstanding stands at a whopping Rs 7,56,900,” says Sinha.

While private banks were quick to hike rates when interest rates were going up,they have been slow in bring them down now that rates are declining,citing high cost of funds. Says Sinha: “Despite a softening interest-rate environment in the last four-five months,my interest rate has dropped by just 50 basis points. Now I am paying 11.75 per cent.”

Sinha is now planning to shift to one of the public sector banks that are offering lower interest rates. Sinha is not the only one caught in a quagmire of financial indebtedness. His experience resonates with home loan borrowers across the country.

Game changer

Recently the country’s largest public sector bank — State Bank of India — launched a special scheme offering 8 per cent rate of interest for home loans. The scheme was soon mirrored by Central Bank of India. There is no upper limit on the loan amount in the case of both banks. Their 8 per cent rate of interest applies only for one year.

According to Ramnath Pradeep,executive director,Central Bank of India,“This scheme applies to all loans taken till March 31. It is aimed at pushing credit flow into the housing sector.”

At a time when floating-rate loans from private players are pegged,in many cases,at above 11 per cent,the 8 per cent offer has electrified the market. However,there is a catch: this low rate applies only for one year. Thereafter,the rate of interest will adjust to the floating rate of interest prevailing a year after.

At present,SBI offers 10.25 per cent rate of interest for loans of between Rs 20 lakh and Rs 30 lakh for a 20-year period. This translates into an equated monthly instalment (EMI) of Rs 981.64 per Rs 1 lakh of loan and into an effective interest rate of 9.94 per cent for this tenure. For a loan amount of above Rs 30 lakh,the interest rate is 10.75 per cent for 20 years. The EMI for this period translates into Rs 1,015.23 per Rs 1 lakh. The effective rate of interest will be approximately 10.36 per cent.

Sub-20 lakh loans after first year. Imagine that you have finished the one-year period and are now shifting to the normal floating rate. In this case,SBI is currently offering a floating rate of 9.75 per cent (for loans between Rs 20 and 30 lakh) and 10.75 per cent (between Rs 30 and Rs 75 lakh). LIC Housing Finance (LIC HF) is offering interest rates between 8.75 and 9.75 per cent for similar amounts.

Let us examine whose offer is better for loans of below Rs 20 lakh. “For loan of up to Rs 20 lakh,the SBI interest rate is fixed for five years and will not go up. SBI even assures that interest rates will be lowered if floating rates drop below 9.25 per cent during the five-year period. Besides,they are also offering free life insurance cover with the policy. I feel that for loans of up to Rs 20 lakh the SBI offer is better. Although SBI is charging 50 basis points higher rate of interest at 9.25 per cent from the second year compared with LIC HF’s 8.75 per cent per annum,it is worth paying for the assurance of a five-year fixed rate plus the single premium payable by SBI on the life insurance policy,” says Harsh Roongta,chief executive officer,Apnaloan.com.

For loans above Rs 20 lakh,LIC HF’s offer is better.

Who should opt for the 8% scheme?

The scheme looks good for new borrowers. In case of those who want to switch,the gains will be higher if your rate differential,principal outstanding and tenure are higher.

“Typically loans with a high tenure should not be looked at from a one-year perspective. However,the scheme looks good for borrowers who have seven to eight years left for loan prepayment. Do your calculations before you take a decision,” says Surya Bhatia,a Delhi-based financial planner (see box). Adds Veer Sardesai,a Pune-based financial planner: “I do not see any harm in switching to such schemes for a year. Interest rates are likely to move southward. After one year,we expect interest rates to be back in

single digits.” u

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