Home loan borrowers with housing finance companies (HFCs) and non-banking lenders are a worried lot. With most public sector banks (PSBs) and a few private sector players reducing home loan interest rate to a 15-year low, their attempt to switch their loans to institutions offering lower interest rates is making little headway.

While home loan transfer from one institution to another to take advantage of lower interest is nothing new, the clamour for a shift is getting louder in recent days as many borrowers are undergoing liquidity stress due to the Covid-19 pandemic. With home loan EMIs accounting for a substantial portion of monthly expenditure, any reduction in outgo is a welcome relief to the borrowers.

According to Shreekant, CGM, Real Estate and Housing Business Unit (REHBU) of State Bank of India, the surge in demand to switch home loans is driven by the trust in public sector lenders and the low interest rates offered by them. Although interest rates of private and government lenders were similar in the past, private banks have not been that aggressive in reducing their lending rates barring few exceptions.

“The problems in the portfolio and functioning of some of the HFCs in the previous years have worried the borrowers,” Shreekant said, adding, “Also, interest rates offered by PSBs are at all time low. So a loan at 6.95 per cent with us is any day better than a 9 or 14 per cent loan with HFCs.”

Ratan Chaudhary, Head of home loans at Paisabazaar.com, a digital lending marketplace, said whenever there is a change in interest rate regime there will always be a shift because people think the new benchmark is more transparent and cheaper.

In October 2019, the RBI mandated that all new, retail floating rate loans have to be linked to external benchmark - repo linked lending rates (RLLR), to make interest rate transmission more transparent and faster. The new repo-linked pricing regime followed by banks has brought stark difference in interest rates.

Consequently, multiple cut in repo rates by RBI over the last few quarters has also resulted in steep fall in lending rates of some banks, especially PSBs. However, interest rates of NBFCs / HFCs still benchmarked on their internal cost of funding, deprives their borrowers from immediate benefit of falling interest rates.

For instance, floating rate of interest on a home loan up to ₹30 lakh in Bank of Baroda or Bank of India starts from 6.85 per cent whereas the interest rate for the same loan amount and tenure in PNB Housing or Indiabulls could cost anything upwards of 8.5 per cent.

“Normally the cost of funding of HFCs will always be higher than that of PSBs,” Pankaj Bansal, Head, Key Account Management of BankBazaar said, adding, “Secondly, the repo rate is at 4 per cent and even when margins are added, the interest rates offered by PSBs will still be attractive to consumers.”

But borrowers are finding it difficult to make the transfer. Social media is flooded with complaints about these institutions not acting on the transfer requests. But the banks and NBFCs claim that they are working with limited staff and the process involves copious paper work and field visits to physically verify the properties.

The transfer will inevitably happen. “If I have a home loan for ₹50 lakh, which I can straight away transfer to a PSB then I can even wait for two months,” Bansal said adding, “because if you calculate 2-2.5 per cent savings on the residual balance of the loan for next 15-20 years, it is still a huge savings from an interest outlay.”

Borrowers facing liquidity challenges due to business loss and salary cuts are not only using this opportunity to switch their loans to lower interest rates but also to extend the loan tenure to reduce their monthly EMI burden.

“Post covid, if a customer’s loan is eligible to be taken over by a bank, then he can get his tenure extended if the bank permits,” Paisabazaar.com’s Chaudhary said, adding, “so he will not only get lower interest rate but his EMI will also come down by getting the tenure of the new loan extended.”

“In takeover loans, if the outstanding has come down, the value of the property has appreciated and if the borrower or bank is in possession of the title deed then we can also give a top up loan for improving their cash flow,” SBI’s Shreekant said, adding, “That is also one of the reason for the uptick in takeover from other banks.”