Thousands of State Bank of India's home loan customers were in for a pleasant surprise a few weeks ago. The huge public sector focused their years of pet peeve by providing an option to lower interest rates to shift upon payment of a conversion of 1%.
This means reducing the equated monthly installments (EMIS) or loan property, especially if you have a home loan before 2009, when the teaser or double tariff arrangements were announced. For years, banks and housing finance companies (HFCs) accused of Measurement of step-motherly treatment to their existing home loan borrowers.
While lenders are eager to lower rates to attract new customers to offer, the generosity is not extended to existing customers, even if the rates drop. SBI has raised the issue by coming up with the conversion scheme.
Other lenders such as ICICI Bank, HDFC Bank and Standard Chartered also capable of such conversions, under conditions in exchange for a fee of 0.5% -1.75% this is the elimination of prepayment penalties by adding a number of banks and HFCs and the old customers are better equipped than ever to their own interests to safeguard.
This does not mean that switching between or within the banks is going to be any easier. The decision must be made based on multiple factors and a careful cost-benefit analysis.
SBI CUSTOMERS BENEFIT?
"Overall it's a good move by SBI, because this would allow many customers to the interest liability to reduce their loans. We believe this would be more beneficial for customers with large outstanding loan or a longer contract," says Kapil Narang, COO, India Ameriprise, a financial planning firm. However, this does not mean you have to do anything if you repay a smaller loan-ticket size.
"Now, let's say as borrowers want to switch to another lender to take advantage of lower interest rates, and their existing lender has waived the prepayment penalty. But, they still may be other costs make such fees, pre-sanction attorneys 'fees, costs for title research, surveyors' valuation fees, stamp duty on the loan agreement and mortgage etc. Instead, if they opt for conversion, these costs are not in the picture "said UN Kulkarni, chief adviser at the Bank of India-backed Abhay Credit Counselling Centre.
ASSESSMENT all parameters
In both cases, it is essential to determine whether the savings on interest expense would be substantial enough to justify the conversion. To arrive at this amount, you should consider several factors including the balance term, outstanding loan, difference between current and new rates, charges involved and the nature of the loan (ie, fixed or variable).
Fixed and variable
Probably the first to be tempted by conversion offers are people looking for their loans to the nature of change - from fixed to floating and vice versa. Variable rate borrowers, after witnessing a sustained rise in prices in recent months could see this as an opportunity to move to fixed fees and bring in an element of certainty for their monthly budget.
However, this can not now recommended, given the fact that fixed rates are significantly higher and interest rates are expected to start declining within a few months. On the other hand, if you are servicing a high interest rate, fixed loan, variable rate loan can be seen as a more sensible option.
"Customers with a fixed rate of 12% or more should consider switching to a floating rate, because in the long run, the RBI can implement rate cuts, which will earn interest on loans," says Narang of Ameriprise. If you have obtained a "teaser-rate home loan scheme, driven by many banks, you can take a wait-and-watch policy.
"Such borrowers should look at taking interest. If it is lower than the current variable rate, they need to tenure ends and then take a call, if interest rates may soften in the coming days," says Kulkarni.
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Thursday, April 5, 2012
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