20 Dec 2011, Mayur Shetty, TNN.
MUMBAI: Floating rate home loans, which did not reflect market rates when they fell, would now become more faithful to their name. With all major lenders discontinuing prepayment charges on floating rate loans, including those refinance , banks say that floating rates will now indeed float.
ICICI Bank waived pre-payment charges on floating rate home loans effective from November 23 this year for both new and existing customers. This is applicable for partial or full prepayment of home loan. The private bank was the last of big lenders in home finance to continue to impose a penalty on borrowers who chose to close their loan account even if it was from their own resources. Now any floating rate loan can be repaid without penalty.
According to a report by rating agency ICRA, there is already a high level of pre-payment in home loans. The rating agency has completed an analysis of home loan portfolios that have been securitized and subsequently rated by ICRA. The median monthly pre-payment rate has been around 1.1%. Banking sources say that in a falling interest rate regime, the absence of pre-payment charges will put pressure on banks to keep revising their rates in line with those prevailing in the market . If there is a surge in pre-payments , it will affect banks that have securitized and sold their home loan portfolios.
Other dominant lenders such as State Bank of India, HDFC and LIC Housing Finance had discontinued pre-payment charges earlier this year. While SBI had done away with all prepayment charges, including those for refinanced loans voluntarily , HDFC and LICHF discontinued with pre-payment penalties following a National Housing Bank directive in October . Other public sector banks and Axis Bank in the private sector did not have a pre-payment penalty on floating rate loans. Other banks have done away with charges following moral suasion from RBI.
Gaining good knowledge about the interest rate will benefit the customers in choosing a right product applicable to their need and choosing a right interest rate is the typical thing in the home loan processing also. A customer has to be very careful before going for a home loan. The interest rate is applicable for the whole repayment period which you are opting for and it will vary when the bank changes the Base and BPLR rates according to the markets. Compare the rates with the other banks and ask whether the interest rate is calculated on daily basis or monthly basis. Please take care of the below steps before taking a home loan.
- Whether the rate of interest is Floating or Fixed.
- If it is Fixed then it is fixed for the whole tenure of it can be changed.
- If the Rate of Interest is floating then at what period of intervals’ the ROI will be changed.
- If the ROI changed then the EMI will increase or the Tenure.
- If part payment made then how the rate changes on your account.
- Will you be notified if any rate change occurs on your account?
Usually when a customer makes part payments in to his/her account the bank will deduct the amount paid directly from the principle and calculate the interest on the remaining amount only by keeping the EMI constant.
Banks usually increase the tenure when there is a change in the Rate of Interest (ROI). If the tenure crosses a period of 300 months then the banks increase the EMI. The floating rate is completely market dependent, and the customer should be aware of the clause in the Fixed rate that the bank can change the rate if there is any huge changes in money market conditions. Customers are always suggested to make part payments to the loan account to reduce the interest amount that is to be paid on home loan.
Banks will different types of offers to save the interest paid on the loan account like “ Home loan interest saver” in which customer needs to open a saving account with the funding bank and the interest earned on the amount deposited in the account will be reduced from your home loan interest.