ibnlive » Business

Feb 06, 2009 at 11:47am IST

Rate cut war: Should I shift my home loan?

In a dramatic move earlier this week, the country’s largest public sector bank, State bank of India (SBI ) cut the interest rates on new home loans to 8 per cent. LIC Housing Finance followed suit with a rate of 8.75 per cent.

With most other banks, especially leading private sector banks and institutions, offering interest rates in double digits, this comes as a breather to many who were waiting to take a home loan. If industry experts are to be believed, other public sector banks may join the rally but private banks may stay away from making any such offers till they get some clarity on cost of borrowing.

In such a scenario, Wealth explores if these are indeed deals to grab.

IN YOUR INTEREST? Private banks may stay away from making double digit interest offers at the moment.

Scenario 1: I am a new borrower; shall I choose this scheme?

"If you are a new borrower, this loan is a lucrative option. You can enjoy the attractive rates for a year and save money too," says CEO of Apnaloan.com, Harsh Roongta.

Even after the expiry of the first year, you can continue your loan with the bank since the rates prevailing then will be close to what other banks will be offering.

Calculate your EMI

Scenario 2: I have an existing loan with another bank; should I shift to the new loan

Roongta advices, "If you already have a loan with another bank, you can consider the switching option. If the current rate on your loan is 11 per cent, by switching you will be saving a considerable amount - a difference of 3 per cent this year!"

If your current banker is willing for the bargain, he might cut your existing rate. Otherwise, even after a foreclosure charge (prepayment penalty), you would be better off shifting because the saving by interest rate will more than make up for the penalty.

Find: Latest home loan rates offered by leading banks

The Fine Print

Experts say that these offers are called teaser loans. And typical features of teaser loans are that you might have to pay a high charge if you decide to pre-close the loan or you will have to bear high interest rate at the expiry of the teaser schemes.

Though that does not mean the current slew of schemes would adopt such practices, it pays to be aware.

So before you sign the dotted line, make sure you read all the terms and conditions in your agreement, especially with respect to the prepayment penalty clause and the interest reset clause.

Don't let higher EMIs ruin your budget

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