In many cases, it may make sense to renegotiate as well.
Floating rate home loan borrowers, stuck on higher interest rates, can expect some relief from tomorrow. The introduction of base rate will ensure that if they are linked to it, they will see automatic rise and fall in their existing rates.
And here’s more good news: The Reserve Bank of India has asked banks not to charge any fee for shifting from prime lending rate to base rate.
Importantly, even though banks are going to charge a fee - in excess of 1.5 per cent in most cases - for renegotiating the loan, it could still make sense in doing so. Once you have shifted to the latest rate, this along with the linkage with base rate will ensure that future costs are saved.
“The PLR regime was stickier. Banks took a longer time to align PLR with the interest rate movements,” KVS Manian, head - retail banking, Kotak Mahindra Bank.
But only home loan rates will be impacted by this, all other retail loans, like auto and personal, are given at fixed interest rate.
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The new reference rate for country’s largest bank is 7.5 per cent. Most of the other public sector banks have the base rate at 8 per cent. These include, IDBI Bank, Indian Bank, Bank of Baroda, Allahabad Bank and Punjab National bank. HDFC Bank has set the rate at 7.25 per cent.
But not all home loan customers would benefit linking their loans to the new benchmarking system. For example, if you have taken a teaser loan just few months back, it would still make sense to stick to it. And with SBI planning to continue its teaser rate of 8 per cent for the next three months, borrowers would continue to benefit.
“In dual rate (or teaser) loans, a borrower gets fixed rates for the initial years. This means, there is predictability of monthly outgo for this period and the borrower, in turn can plan his finance accordingly without bothering about interest rate fluctuation,” said a certified financial planner. For an existing borrower, there are some situations in which they will benefit by shifting. In other cases, it may not make much difference.
Less than one year: If you have taken the loan just a year back, around 90 per cent of the equated monthly instalment (EMI) goes towards repayment of interest and the rest towards principle. If serving a floating rate loan for less than two years, financial planner said it makes sense to shift the loan - even if the lender is charging you an interest of 9 - 9.5 per cent.
When a person shifts to base rate, the interest is likely to remain the same. In addition, shifting is free. Shifting early to the new benchmark would only help to get the benefits earlier. And if the existing loan rate is around 1-2 per cent lower than your existing rate, it makes sense to renegotiate as well. Of course, there will be a charge. But you can easily get into a new regime which is completely new and more sensitive to changes.
Two-five years: There is a strong possibility that such borrowers are stuck at higher floating rates of 12-13 per cent. It certainly makes sense for them to shift from their existing rates to new ones. And by paying the renegotiating charges as well.
Other customers should shift to the base rate as even in the fifth year, the interest portion is as over 40 per cent if the tenure is 15 years and more for loans with longer tenure.
There are customers who fixed their loan rate at 7.5 - 8 per cent in 2003-04 period, it makes less sense for them to shift. Especially, if their loan rate is fixed for the entire tenure.
5-10 years: This is a crucial period to decide whether to shift or not. For a 15-year loan, two-third of the loan is repaid. For 20-year loan, the interest portion in the tenth year is still more than principle.
“There are chances that a person has brought the tenure further down by prepaying a portion of the loan as and when possible,” said a certified financial planner. A person can stick to the BPLR who has 15-year tenure. For loans over 15 years, base rate would make sense as there are still many years left to service the loan.
Over 10 years: If your loan tenure is of 20 years, almost 50 per cent of the time period is remaining. But the good part is that most of the interest payout has taken place.
During these years, the principle portion in the EMI accounts for 60 per cent or more, as you get closer to repaying the loan. Shifting to base rate is a tough call in such a situation. Do your math and compare the advantages of BPLR vis a vis base rate. If you have more than three years to repay the loan and you still saving money on the EMI, go for it.
Bottom line: Shift to base rate anyway. Because it will ensure that you get the advantage of loan rate fluctuations.
As far as renegotiations go, it would be a decision based on the tenure that is remaining, and your finances.