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Home Loan: Banks increase PLR but not Base Rate

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Home Loan: Banks increase PLR but not Base Rate

Last updated: August 23 2010
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  • Home Loan: Banks increase PLR but not Base Rate

    Recently all banks have increased their PLR which has effected in old home loan customers being charged more interest rate. However all of them have kept their base rate same. So new customers are still getting home loan at the same rate which was before one month. Even the PSU banks like BoB and SBI have done this.

    Now banks are also offering old customers to shift to base rate system. In this case what will be the interest rate offered to those old loans?

    e.g.
    > I have an existing home loan at 8.5% i.e. PLR - 3.5 % (or Base Rate + 0.5 if I were in base rate system).
    > BoB was and is offering home loans at 8.75 %. i.e. PLR -3.25 or Base Rate + 0.75.
    > After increasing PLR by 0.5% my loan interest rate is now 9%. If I were on base rate system, my interest rate would not have changed.
    > Now if I move to base rate system, what will be the interest rate offered to me by bank?

    I will be checking with the bank this saturday, but before that thought of exploring experts on this forum.
  • #2

    #2

    Re : Home Loan: Banks increase PLR but not Base Rate

    To all, go ahead and CHANGE TO A BASE RATE - DONT BOTHER ABOUT THE INTEREST RATE - ITS GOING TO HELP YOU IN THE LONG RUN !!!

    Comment

    • #3

      #3

      Re : Home Loan: Banks increase PLR but not Base Rate

      Guys, please advice.

      Has anybody changed home loan interest rate to base rate system?

      Comment

      • #4

        #4

        Re : Home Loan: Banks increase PLR but not Base Rate

        Home loans: Time to touch base after PLR hikes?

        Following the Reserve Bank of India’s (RBI’s) decision to hike its key policy rates in its monetary policy review last month, some banks have raised their prime lending rates (PLR) even as they left their recently-declared base rates unchanged.

        According to the RBI’s guidelines, all categories of loans sanctioned after July 1 have to be linked to base rate — the floor rate below which a bank cannot lend, while the ones extended during the old regime could continue till they are up for renewal or a switch over takes place on mutually agreed terms.

        For home loan borrowers, what the recent PLR hike means is that those who have taken a loan after July 1 — when the base rate regime came into being — will not be affected by this hike, but those who have not made the switch to base rate yet will see their equated monthly instalments (EMI) moving northwards. It is seen as an attempt by lending banks to coax borrowers to embrace the new benchmark.

        Consequently, the question topmost on the minds of borrowers with home loans linked to PLR is whether it’s best to voluntarily shift to base rate to ensure lower home loan interest rate. The answer to the question perhaps depends on the situation you are in.

        If last instalment due is several years away

        Those who have taken a home loan, say five years ago, and still have several years to go before the repayment tenure ends would do well to look at moving to base rate. “Borrowers would be better off switching to base rate as it is mathematically arrived at and is a more transparent method of computing the benchmark. Any changes in the liquidity situation or policy rates will have a direct bearing on home loan rates for all borrowers,” explains Kamlesh Rao, executive vice-president, personal finance and mortgages, Kotak Mahindra Bank.

        The purpose of getting banks to devise a new methodology of determining benchmark was to introduce more transparency into loan pricing and ensure a fair deal for old borrowers. In the past, banks have been accused of meting out step-motherly treatment to existing borrowers. During the global slowdown, when the central bank reduced policy rates to prevent economic growth from slipping, banks were quick to cut lending rates to attract new borrowers, but the benefits were passed on only sparingly to existing borrowers. On the other hand, when interest rates move upwards, banks rarely hesitate to increase the home loan rates.

        The new mechanism requires banks to review their base rates at least once every quarter and ensure that any changes made are applicable to all class of borrowers. For instance, if your bank has fixed its base rate at 7.5% and the home loan rate is pegged at base rate + 2%, that is, 9.5%. If the base rate is revised downwards by 50 basis points, your home loan too will have to come down to 9%. In the earlier regime, this would not necessarily have been the case as banks could afford to avoid reducing PLR, while continuing to lend to corporates at sub-PLR.


        If your loan is nearing closure

        Now, consider another scenario, where you have merely a year left to call your house entirely your own. Do you opt for base rate, since it is meant to be loaded in favour of the borrower? “Such a situation calls for a comparison between the rates applicable currently and the ones linked to base rate. If the old rate is beneficial, it may be better to continue with it,” says VN Kulkarni, chief counsellor with the Bank of India-backed Abhay Credit Counselling Centre.

        If you have borrowed under the special teaser rate schemes

        Such borrowers are currently best placed in terms of being spared of the dilemma to choose between base rate and PLR. These loans are so structured that a pre-determined interest rate is charged in the initial years, after which it tracks the interest rates prevailing then. Therefore, once the fixed-rate period draws to a close, their loans will be automatically linked to base rate. In short, at the moment, they do not need to do anything.

        Comment

        • #5

          #5

          Re : Home Loan: Banks increase PLR but not Base Rate

          Originally posted by pcpune View Post
          Home loans: Time to touch base after PLR hikes?

          Following the Reserve Bank of India’s (RBI’s) decision to hike its key policy rates in its monetary policy review last month, some banks have raised their prime lending rates (PLR) even as they left their recently-declared base rates unchanged. .


          Pcpune, thank you very much. This info will help for all type of borrowers.

          Comment

          • #6

            #6

            Re : Home Loan: Banks increase PLR but not Base Rate

            Originally posted by pcpune View Post
            Home loans: Time to touch base after PLR hikes?


            Following the Reserve Bank of India’s (RBI’s) decision to hike its key policy rates in its monetary policy review last month, some banks have raised their prime lending rates (PLR) even as they left their recently-declared base rates unchanged.

            According to the RBI’s guidelines, all categories of loans sanctioned after July 1 have to be linked to base rate — the floor rate below which a bank cannot lend, while the ones extended during the old regime could continue till they are up for renewal or a switch over takes place on mutually agreed terms.

            For home loan borrowers, what the recent PLR hike means is that those who have taken a loan after July 1 — when the base rate regime came into being — will not be affected by this hike, but those who have not made the switch to base rate yet will see their equated monthly instalments (EMI) moving northwards. It is seen as an attempt by lending banks to coax borrowers to embrace the new benchmark.

            Consequently, the question topmost on the minds of borrowers with home loans linked to PLR is whether it’s best to voluntarily shift to base rate to ensure lower home loan interest rate. The answer to the question perhaps depends on the situation you are in.

            If last instalment due is several years away

            Those who have taken a home loan, say five years ago, and still have several years to go before the repayment tenure ends would do well to look at moving to base rate. “Borrowers would be better off switching to base rate as it is mathematically arrived at and is a more transparent method of computing the benchmark. Any changes in the liquidity situation or policy rates will have a direct bearing on home loan rates for all borrowers,” explains Kamlesh Rao, executive vice-president, personal finance and mortgages, Kotak Mahindra Bank.

            The purpose of getting banks to devise a new methodology of determining benchmark was to introduce more transparency into loan pricing and ensure a fair deal for old borrowers. In the past, banks have been accused of meting out step-motherly treatment to existing borrowers. During the global slowdown, when the central bank reduced policy rates to prevent economic growth from slipping, banks were quick to cut lending rates to attract new borrowers, but the benefits were passed on only sparingly to existing borrowers. On the other hand, when interest rates move upwards, banks rarely hesitate to increase the home loan rates.

            The new mechanism requires banks to review their base rates at least once every quarter and ensure that any changes made are applicable to all class of borrowers. For instance, if your bank has fixed its base rate at 7.5% and the home loan rate is pegged at base rate + 2%, that is, 9.5%. If the base rate is revised downwards by 50 basis points, your home loan too will have to come down to 9%. In the earlier regime, this would not necessarily have been the case as banks could afford to avoid reducing PLR, while continuing to lend to corporates at sub-PLR.





            If your loan is nearing closure

            Now, consider another scenario, where you have merely a year left to call your house entirely your own. Do you opt for base rate, since it is meant to be loaded in favour of the borrower? “Such a situation calls for a comparison between the rates applicable currently and the ones linked to base rate. If the old rate is beneficial, it may be better to continue with it,” says VN Kulkarni, chief counsellor with the Bank of India-backed Abhay Credit Counselling Centre.

            If you have borrowed under the special teaser rate schemes

            Such borrowers are currently best placed in terms of being spared of the dilemma to choose between base rate and PLR. These loans are so structured that a pre-determined interest rate is charged in the initial years, after which it tracks the interest rates prevailing then. Therefore, once the fixed-rate period draws to a close, their loans will be automatically linked to base rate. In short, at the moment, they do not need to do anything.

            Thanks PCPUNE.

            I want to know if anybody shifted home loan from PLR to base rate system and wht was the interest rate offered by bank it.

            Comment

            • #7

              #7

              Re : Home Loan: Banks increase PLR but not Base Rate

              Has anybody shifted from PLR to Base Rate in SBI ?

              Comment

              • #8

                #8

                Re : Home Loan: Banks increase PLR but not Base Rate

                I recommend all to just go ahead and DO IT, it will always be advantageous for you.

                Comment

                • #9

                  #9

                  Re : Home Loan: Banks increase PLR but not Base Rate

                  Update

                  I visited the bank branch on Saturday.
                  The manager assured me of reducing the interest rate to 8.5% again after I switch to base rate system.
                  Such a relief for me. Happy for my decision on going with BoB for a home loan.

                  Comment

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