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Home truths

Home loan borrowers need to be especially watchful for hidden costs now

Home loan borrowers have been hit by yet another round of interest rate hikes, what with the Reserve Bank of India (RBI) raising the repo rate — the rate at which it lends to banks — twice, first by 50 basis points in June and now by another 50 basis points on July 29.

Banks have responded by raising their prime lending rates — and their housing loan rates. Take ICICI Bank, which raised its floating reference rate (FRR) for consumer loans from 13.50 per cent to 14.25 per cent from July 31 — it had raised the FRR by 75 basis points in June too. Its 20-year floating rate housing loan is now between 12 and 12.25 per cent.

HDFC too raised its floating-rate home loan to 11.75 per cent for all amounts and tenures — it had raised it from 10.25 per cent to 11 per cent in June. Thus, the equated monthly instalment (EMI) per Rs 1 lakh has gone up from Rs 1,033 (at 11 per cent floating rate) to Rs 1,084 (at 11.75 per cent) for a 20-year loan.

Others like Punjab National Bank and Axis Bank too have raised housing loan rates, and more banks are to follow suit. Nor is this likely to be the last of the rate hikes.

Harsh Roongta, CEO, Apnaloan.com, says: “Given the current difficult environment, if you’re in a position to take a loan now, you should be more conservative than normal and keep some more contingency cushion in case of a further rate increases.”

It’s not just the best interest rates that home loan borrowers need to shop for though. They’d do well to look at other costs too, says Roongta. There’s the processing fee for one. This can range from 0.25 per cent to 1.50 per cent of the loan amount. Borrowers need to consider the stamp duty on the mortgage deed too, which may be charged separately.

“But the biggest cost that most people overlook is the pre-payment penalty. After all, about two-thirds of borrowers pre-pay their housing loan,” says Roongta.

As for existing borrow-ers, they need to check if their lender is levying the right interest rate, cautions Roongta. For instance, he says, some existing borrowers may be paying 12.50 per cent interest, higher than what new borrowers pay. “That’s because our floating rate administration is extremely non-transparent. It’s only when borrowers threaten to switch that lenders lower rate,” he says.

This happens because home loan rates are linked to the lender’s reference retail prime lending rate (RPLR). A borrower may have taken a loan at a spread of minus 1.50 per cent to the RPLR. When the RPLR for HDFC was, say, 11.25 per cent, the loan rate would have been 9.75 per cent. Now with the RPLR rising to 15 per cent, the loan rate comes to 13.50 per cent, higher than its rate for new borrowers of 11.75 per cent.

There are options to switch though. HDFC has a conversion facility, where a borrower can switch to a better spread by paying a fee of 0.50 per cent of the outstanding amount for a first-time switch and 0.25 per cent subsequently. Customers should ensure that the loan rate after conversion is better than the existing rate and the cost of the switch reasonable.

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