The Hindu Business Line : Benefit from home loan swap

If you thought only crude oil prices have fallen drastically to 2006 levels, think again; with the recent spate of interest rate cuts in home loans by SBI, the rate offered by the bank is back to its 2005 levels.

State Bank of India has now come out with yet another rate cut for all categories of home loans. For a period of one year from now, the interest rate will be fixed at 8 per cent irrespective of the loan amount. Further, for an existing home loan customer, the bank has introduced a multi-purpose SBI Lifestyle Loan, where customers can borrow up to 10 per cent of their home loan up to Rs 5 lakh at an interest rate of 8 per cent per annum for one year. This effectively works like a personal loan.

With the housing sector under pressure of the slowdown and the declining interest shown by home buyers, public sector banks (PSB) are now offering competitive interest rates, so much so that they appear attractive compared to their private sector peers’ offering. Recently PSBs announced two sets of interest rates one up to Rs 5 lakh (at 8.5 per cent) and above Rs 5 lakh to Rs 20 lakh at 9.25 per cent as part of the Government’s stimulus plan.

Will the rate cut offer any substantial benefit to the borrowers? Going by the fact that an average size of home loan in SBI’s portfolio is about Rs 17 lakh, we look at the impact for customers who take a Rs 5 lakh or Rs 20 lakh home loan.

If one opts for a fresh loan of Rs 5 lakh the effective saving comes to Rs 1,560 (compared to the earlier rate of 8.5 per cent). For a Rs 20-lakh loan, it works out to Rs 16,100 per annum (compared to earlier rate of 9.25 per cent). But going by the trend, interest rates are clearly heading south, providing an opportunity for genuine first time buyers. The overall interest rate appears conducive for such a buyer.

Swap

If you are an existing home loan borrower with any other bank and paying interest of 12.5 per cent, the offer by SBI may help you save a decent sum for at least a year if you opt for a transfer of loan.

The cost of such a pre-closure may work out to about 2 per cent of the outstanding. Further, you may be charged 0.5-0.75 per cent for processing and legal charges.

Assuming your outstanding loan is Rs 20 lakh with an interest of 12.5 per cent and balance tenure of 15 years, your saving for one year would be Rs 11,450 (for 15 years at 12.5 per cent your EMI works out to Rs 2,95,812 lakh per annum and at 8 per cent it works out to Rs 2,29,368 lakh) after deducting 2.75 per cent (Rs 55,000) of your outstanding.

While the amount may appear to be insignificant given its short period, investors should keep in mind that after this one year, they may move to an interest rate regime that could well be lower than the present rates.

Personal loan

Apart from the home loan, customers would find the “Lifestyle” loan offer or, in other words, the personal loan tagged with the offer an attractive proposition.

Assuming you have an existing home loan with SBI, you can borrow 10 per cent of the loan amount at 8 per cent for one year.

If you have availed any other personal loan at a higher cost, this attractive interest provides an opportunity to swap the loan and to reduce the interest cost at least for a year. However, the maximum amount of such personal loan is restricted to Rs 5 lakh.

More Stories on : Housing Finance | Public Sector Banks | State Bank of India

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page