Home loan goodies: Did you check the fine print?

Every time Reserve Bank announces a cut in repo and reverse repo rates, the home loan borrowers get excited. The general expectation is that their home loans would become cheaper, which in turn means lower EMIs and more money in bank accounts.
 
Unfortunately, despite the repo and reverse repo rates nose-diving in the last six months, home loan holders have had little to cheer. Expectedly, many borrowers have started shopping around for a lender who can give them loans at new rates by taking over their old loans. After all, banks are always partial to new borrowers than the old ones.

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Since a friend insisted that I should help her to `take advantage of the fall in home loan rate' I decided to shop around for her loan. The experience, of course, was not very exciting as banks seem to have gone back to the days of considering a borrower as the least important mortal.

At one of the branches of a leading nationalised bank, the help desk even refused to give out an application form, as the concerned official wanted me to travel 10 km, since I was not the customer of the bank! With private sector banks it was a different story as most banks have decided to look within and are keen on lending only to their existing customers.

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Even with respect to nationalised banks, the low rate comes with a lot of restrictions and conditions. To start with, banks are not ready to alter the loan amount through takeover and are willing to offer only the amount outstanding.

So if you thought you could borrow higher amount and look at the option of repaying some of your high-cost loans like personal loans, you can give up the idea. But the most important thing is the lower rate is for a specific period of time and after the expiry of such a period, you are once again exposed to the risks of interest rate fluctuations.

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Here again, there is plenty of fine print. For instance, some banks offer the cheaper rate for a period of one year irrespective of the amount. In the case of many others, the rate is dependent on the loan amount and here you need to do some mathematical jugglery.

For instance, if the offer of cheaper rate is for a loan of below Rs 30 lakh and if the loan amount is Rs 32 lakh, prepay the excess of Rs 2 lakh to your existing lender and then transfer the loan to fresh bank. Since the differential interest is in the range of 0.5%-1%, the saving is worth a look.

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But more importantly, prepare yourself for any fluctuation in interest rate with upward bias.

The threat for interest rate spike is from the government, which has taken up massive borrowing programme. Since the stimulus measures are expected to suck up the liquidity from the system, we could be in for mild upward revision in the medium term. One of the best ways for dealing with the risk is by setting aside the saving resulting on account of transfer of loan.

For instance, if you are currently paying an EMI of Rs 22,000 and if it comes down to Rs 16,000 after the shifting of loan, go for an SIP of Rs 6,000 as you were anyway used to the monthly outgo of Rs 22,000.

Over a period of two years, you can expect a saving of close to Rs 1.5 lakh. Even if interest rate moves upwards after couple of years, it should not pinch you as you have the surplus to manage it. Something, most home loan borrowers missed during the last few years!

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Srikala Bhashyam is the Managing Partner of RS Consultants. She runs an investment-consulting firm in Bangalore to provide consultancy in the areas of financial planning and media. In the last 15 years, she has worked with top publications in different locations. The primary focus of all her columns is to simplify the nuisances of Finance, which has attained a new look over the years. Besides being a columnist, Srikala has also been closely associated with some of the prestigious book projects.

The author can be reached at srikala.bhashyam@gmail.com

The views expressed in the article are the author's and not of Sify.com.

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