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Set the Best Rate

Sowmya Kamath        Print Edition: March 2012

If the high interest rate on home loan is giving you sleepless nights, it may be time to de-stress. While you decide whether to break that big fixed deposit to pay off a part of the loan - this has become easy now with most banks and housing finance companies , or HFCs, not levying pre-payment penalty - there is another option you can look at.

A number of banks and HFCs reduce the interest rate on floating rate loans for a fee. There is also the option of shifting the loan account to a lender offering a lower rate.

NATURE OF LOAN SCHEMES
You can get the rate reset at a lower level if you are being charged more than what new customers are paying. While some banks charge 25-50 basis points, or bps, of the outstanding loan amount for this, many calculate the fee on the basis of the difference between the rate you are paying and the market rate.

"We charge half a percent if the difference between the rate charged and the market rate is half percent and one percent if the difference is 2-3 per cent. So, it depends from customer to customer," says Jairam Sridharan, senior vice president and head of consumer lending and payments, Axis Bank.

HDFC charges half the difference between your home loan rate and the market rate. For example, if a customer is being charged 12.5 per cent and the rate for new customers is 10.5 per cent, HDFC will charge 1 per cent. It is a one-time payment. "The lender, however, retains the right to reject a reset request," says Sumit Bali, executive vice president, Kotak Bank.

Banks may refuse to reset the rate for customers with a history of default. "We check the customer's credit score. If there is a drastic change, say the person now comes in the distressed profile category, we may not cut the rate. But this is done only if the person's credit score has changed drastically," says Sridharan of Axis Bank.

AFTER CONVERSION
While the paperwork is minimal, the new rate, too, is subject to changes. For example, if the Reserve Bank of India, or RBI, raises policy rates, banks will in all likelihood pass on that to you. However, a rate cut will bring benefits. In short, the new rate will also be floating.

Processing Fees and Price Card
After the rate reset, the customer can reduce equated monthly instalments, or EMIs, or the loan tenure. "We try to keep EMIs the same and reduce the tenure. Customers can opt for lower EMIs but for that they will have to issue fresh post-dated cheques. The process requires some documentation," says Sridharan.

Considering the market is anticipating a rate cut by the RBI, it makes sense to opt for such a scheme. However, it will not benefit everybody.

WHO SHOULD OPT?
Typically, a person who has a long tenure left for repayment and a large outstanding will benefit more. The fee is calculated on the basis of the outstanding amount. If the amount is small, the fee, say experts, won't fall below a certain point. So, it makes little sense to go for a rate reset in such cases.

"If the tenure of your loan is not long, you should not opt for a reset. In general, for shorter tenures, it's not a great idea," says Sridharan. Here's how this works. If the outstanding loan is Rs 10 lakh and the balance term is 13 years, HDFC will charge Rs 10,000 only once while the benefit of the reduced rate will accrue for 13 years. Therefore, the fee charged will be Rs 10,000/13 years, which comes to Rs 770 a year. For shorter tenure loans, the per year cost will be higher.

"Also, if the difference between your home loan rate and the market rate is just 50 bps, it does not make sense to shift," says Sridharan.

LOAN BALANCE TRANSFER
Since many banks now do not charge pre-payment penalty , one can think of transferring the loan to another bank. However, for this, you must take into consideration things such as processing fee payable to the new bank.

Many banks charge 0.5 per cent of the loan amount as processing fee, while some charge a flat Rs 5,000-10,000. Transferring a loan will also involve a lot of documentation.

Before going for loan transfer, you should look at the ability of the bank to reduce rates in a falling rate scenario. This is because some banks increase rates as soon as the RBI raises rates but are slow in passing on the benefit of any rate cut to customers.

Another important consideration is transfer of your documents. There have been cases of lending institutions losing the original documents. While many banks and HFCs take utmost care in taking delivery of your original home documents from your previous lender, any failure can cost you your original property documents.

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