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Factors that influence your loan rate:-
Money lent by banks and financial institutions for various purposes come with a cost, which is known as the loan rate or the interest rate at which the loan is lent.
In recent times there has been a spate of CRR (cash reserve ratio) and repo rate cuts following which interest rates on home loans have been slashed. This has been a welcome relief for potential, first-time home buyers who have been waiting for this to happen for a long time.
So what do CRR, repo rate, reverse repo rate, SLR, et cetera mean in the context of your home loan interest rate? Well, all these factors have a direct impact on the PLR (prime lending rate), which correspondingly increases or decreases the interest rates of loans.
Let's take a quick look at what all these terms mean to see how they affect the loan interest rates.
Prime Lending Rate (PLR):-
This is the benchmark interest rate on the basis of which financial institutions decide the interest rates on the various loan products. For example, a bank might say a loan interest rate will always be 0.5% above the PLR. This means, if the PLR increases or decreases by a certain amount, the interest rates charged on the floating rate loans offered by the bank also increase or decrease by the same amount.
Cash Reserve Ratio (CRR):-
It is the percentage of cash deposits that banks need to keep with the Reserve Bank of India on an everyday basis. Increasing the CRR also means banks have lesser money to lend. RBI adjusts the CRR to change the amount of liquidity in the financial system, which helps to keep the inflation within reasonable limits.
Also, when CRR is increased, the interest rates also increase as the amount of liquidity in the financial system decreases. RBI has made frequent CRR cuts in the recent past to inject liquidity into the financial system. This is expected to impact the interest rates bunched with other favourable aspects for home loan applicants.
This is the interest rate at which RBI lends money to the banks whenever they need to borrow funds from RBI. When the repo rate decreases its good news for the banks as they can avail more funds at a lower interest rate and vice versa.
Reverse Repo Rate:-
This means just the opposite! Here, RBI borrows funds from the banks and when the Reverse Repo Rate increases banks are very happy to lend money to RBI because of the attractive interest rates RBI offers to obtain the loans.
SLR (Statutory Liquidity Ratio) Rate:-
Every commercial bank needs to maintain a certain amount of funds in some form -- which includes cash, gold, government bonds, etc -- before they can provide credit to its customers. This measure helps RBI have control over the bank's credit expansion, keeping it realistic.
The collective impact of all these rates influence the liquidity in the financial system and lead to an increase or decrease in PLR, which in turn affects loan lending rates.
Benchmark Prime Lending Rate (BPLR):-
A while ago, those who had been subjected to steep interest hikes in the past eagerly looked forward to see the interest rate cuts from their banks. Some banks were planning to pass on the benefits to the existing customers while some others were cutting down interest rates only for their new customers.
What were the factors that came into play here? How are banks able to give the lower rates only to new customers while keeping older customers at a higher rate? Well, banks have something called the benchmark prime lending rate, which is a reference interest rate that is used as a benchmark to determine the interest rate that is passed on to the customer.
The interest rate that is finally passed on to the customer is X% plus or minus this benchmark prime lending rate.
This X% is termed a 'spread', and is left to the discretion of the bank to set and depends on the other factors involved in loan eligibility like the credit profile of the loan seeker, for instance.
According to RBI regulations, banks are required to make changes in existing loans except fixed interest rate home loans, when they change their existing BPLR.
However, since banks are given the freedom to set the spread from the BPLR at whatever value they choose for new customers, they are able to provide attractive rates to new customers while continuing to charge a much higher interest rate for older customers.
For example, suppose Suresh took a home loan at a floating rate of BPLR minus 2% at a time when the bank's BPLR was 9%. The floating rate of 7% that he received was attractive and it seemed to be the right decision to choose this loan.
Over time the BPLR of the bank increased to 15% and Suresh's floating rate became13%. However, Suresh's bank is now offering a floating rate of BPLR minus 3.5% to new customers, which means that new customers are paying a rate of 11.5%, while Suresh is stuck with an interest rate of 13%.
The irony of this situation is that Suresh signed up for a floating rate knowing that his rate would increase or decrease according to market conditions, not realising that his bank has the power to not share the benefit of a falling rate with him.
From the bank's perspective this is profitable, as they will end up making more money off Suresh's loan if they charge him a higher interest rate.
Banks have various clauses in the loan agreement that keep the best interests of the lender in mind as the money outflow from banks, even on an everyday basis is enormous. As shown in the example above, the clause that dictates banks can opt to choose the 'spread' from the BPLR is the catch that loan consumers need to be aware of.
However, after what seemed like a long wait banks have started to effect changes in their BPLR in the wake of the current spate of repo and CRR rate cuts.
Every bank has a cycle to bring the benefit of this change to the existing customers. According to bank policies, this change or floating interest can come into effect on a quarterly or yearly basis or with immediate effect.CommentQuote0Flag
- Thanks realacres.
I would like to add.
i) Floating rate start as low as 8.0% (Almost 5 months back I got home-loan of #20 lacs at 8.5% from BoB).
ii) Loan tenure can be upto 20 years.
In incentives offered by bank:
i) Free personal insurance. If there are two applicants (husband & wife) both can be insured with very little additional charged.
So loan amount is insured against death of any applicant.CommentQuote0Flag
- Originally Posted by realacres
What is a fixed rate of interest?
Some institutions have a fixed rate of interest, which means the rate of interest remains unchanged for the entire duration of the loan. This means you do not benefit, even if rates of interest drop in the market.
Very NIce info. Thanks for efforts.
I will like to add important thing abt 'fixed rate of Interest'
Interest rates for fixed rate loan are generally higher by 2 to 3% than floating rates. Also there is money market claw which says that banks will review rates after 3 yrs and if there are drastic changes in money market conditions then banks can increse even fixed rate of interest. So there is a risk that even fixed interest rates can go up after 3 yrs.CommentQuote0Flag
- Also fixed rates in most cases are fixed for only five years.. definitely ask for the duration of fixed part.. its like credit card.. lifetime free.. who lifetime.. cards lifetime.. 3 years..CommentQuote0Flag
- Hi Realacre,
Could you please tell me that How " EMI in the daily reducing system is less than the monthly reducing system. " if we are paying monthly installment not daily???CommentQuote0Flag
- Fixed rates!
There seems to be NO fixed rate of interest.
Interacted with some PSU banks, according to them, there is no fixed rate
of interest. Banks r wary to get locked at lower interest rates for loong
periods. With the economy in downturn their confidence is low. As per
them, even if u do fixed rate, it will be reveiwed and reset after 3/5 yrs.
So practically there is no fixed rate, and floating is advised to avail
- Originally Posted by ash7979Hi Realacre,
Could you please tell me that How " EMI in the daily reducing system is less than the monthly reducing system. " if we are paying monthly installment not daily???
What you are talking about is Monthly reducing. Please don't get confused between Monthly reducing & Daily Reducing.
The interest component in EMIs in initial years is high compared to principal amount. So, a person might have paid EMIs worth INR 5L, but the principal amount maybe just about INR 30,000/-.
In this system, the principal, for which you pay interest, reduces from the day you pay your EMI. EMI in the daily reducing system is less than the monthly reducing system.
Total amount (EMI) is made up of Principal amount (P) + Interest amount (I)
Here you save some component of interest as principal amount is paid from day one, the amount is adjusted on pro-rata basis which makes EMIs less compared to other system & hence total EMIs value is less in daily reducing system.
However, I don't think all banks follow this system. Get it checked from your bank. If yes, opt for the same.CommentQuote0Flag
- Thanks for inputs.
Thanks for your inputs you shared here. I appreciate them. Why not discuss other factors like the total amount of loan in terms of %age the banks are lending, collateral, general T & C, preference between PSU Bank & Private banks etc.
- I hope you are confused with daily & monthly reducing EMIs....As the day you will pay your first EMI & think most probably that date will be your EMI paying date for next subsequent months,so there is no difference in EMI in daily reducing or monthly reducing EMIs, that only difference comes when you perpay or made a part payment then principal will get reduced from the day you made part payment in daily reducing but in monthly reducing that will effective from your EMI date.
So I think EMI value would be same both in daily reducing & monthly reducing...As I have not seen daily reducing/monthly reducing in any of the EMI calculator on internet while calculation EMI for any principal amount...I think I am clear enough here:)CommentQuote0Flag
- Pre-approved home loans.
Not many would know this, but banks do give in-principle sanctions or pre-approvals for home loans. Indeed, barring the technical property check and property verification, the entire approval procedure can be completed beforehand.
To find out the amount a bank would be willing to lend to you, approach the nearest branch.
What does a sanction mean?
Banks give out in-principle approvals for home loans to borrowers who have not yet decided on the property. This helps home buyers know the amount of loan a bank would be able to make to them, and thereby, the balance amount that they will have to organise. This helps one set a budget limit and look out for a house he can afford. The bank checks the prospective borrower's income and decides the loan eligibility based on that. Disbursal of loan, however, can only be made once the property is finalised.
What are the parameters for eligibility?
First, the credit history of a person is checked through a database of past loans and repayments available with the Credit Bureau of India (Cibil). The bank then sees the salary or the income of the person and decides the loan amount that can be given. Usually, public sector banks give out loans to the extent of 60 times the net salary or 36 times the gross salary, as per a public sector bank official. "The person should have been working for at least three years," he says.
What are the documents needed to get sanction?
The banks need your income proof, which would be substantiated by salary slips, bank account statements for six months and your income tax return for past three years. Your permanent account number (PAN) card too would have to be submitted as an identity proof and address details.
Would a letter be handed out to you?
The banks would hand over a letter stating that an in-principle approval of a particular home loan amount has been granted and is valid until a said date. The in-principle approval is subject to verification of the property documents and the property itself, say bankers. The other terms and conditions and the interest rate are mentioned therein.
Kotak Mahindra Bank offers the said interest rate for the sanction validity period. This means that when you got a sanction, the ongoing interest rate was 10.5%. So the loan would be provided to you at this interest rate till the end of the sanction period and may change later depending on whether you opt for a fixed or floating home loan rate in case actual interest rates change.
Is the entire loan processing fee charged for sanction?
Each bank charges differently for providing an in-principle approval for the home loan.
"The loan processing fee is charged to the customer and that can be refunded depending on the situation. The refund parameters are a part of the sanction letter," says Sujan Sinha, senior vice-president - retail assets at Axis Bank.
Among others, LIC Housing finance charges Rs 1,123 for in-principle approval of loan amounts up to Rs 25 lakh and Rs 5,500 for amounts above that. Kotak Mahindra Bank charges a flat service fee, between Rs 1,000 and Rs 2,000, for sanctioning the loan. SBI does not charge anything for providing in-principle approval.
When do you have to submit the final home documents?
In-principle sanctions for home loans handed out by banks are valid only for a short period during which the buyer must select the property of his choice and be able to furnish the necessary documents. Else, he would have to undergo the approval process all over again. The validity period varies from bank to bank and ranges from one to six months, with most banks giving the approval only for a month.
Can the eligibility change after the validity period?
"We will check the bank account statement of the borrower before disbursement. If, during the validity period, the borrower has taken other loans, the eligibility might change. This is mentioned in the sanction letter," says Rao of Kotak Mahindra Bank.
Similarly, other banks say they check whether the salary of the person remains the same or whether his job is still secure to ensure that the borrower would be able to repay.
What if I do not want to waste money in getting a loan sanctioned now?
Most banks claim they process the loan application within seven days. But that timeframe is sometimes not provided when one is going for a distressed asset sale. Hence the need to have a loan sanctioned in advance. But, if you are not sure you can zero in on a property within the validity period, it is best not to waste money on getting an in-principle approval.CommentQuote0Flag
- What about today's news on SBI improving the home loan rate ? Which is the best option....SBI...HDFC...BoB...ICICI...PNB ?
Pls advise....Thx - HarishCommentQuote0Flag
- Originally Posted by harishkulksWhat about today's news on SBI improving the home loan rate ? Which is the best option....SBI...HDFC...BoB...ICICI...PNB ?
Pls advise....Thx - Harish
PSU banks are better as they go through the credentials of the project in detail before giving you the sanction letter. I know that there exists builder-banker lobby especially between builder-ICICI where cases of payments to builders despite construction not going on has taken place.
At the end of the day, builders make merry & bankers too make a life hell if the flat doesn't complete & you keep paying EMIs.
Best would be PSU banks. Of course, if you do have a salary account with particluar bank, be it Private or Public, it is added advantage as special interest rates are offered & bankers are a bit lenient too!
* Stay away from ICICI.CommentQuote0Flag
- Experienced people (those who have taken loans from Private/Public banks) always say that PSU banks are always better though you have to take a little bit of extra efforts in the intial phase. But once your loan is sanctioned you can stay cool for lifetime. Private banks may offer lower interest rates in the beginning but they take out money indirectly and can prove costly in the long run.
Option of taking loan from Private banks and then doing BALANCE TRANSFER to PSU banks is another good option. Some private banks like AXIS, IDBI dont charge on balance transfer.CommentQuote0Flag
- Home loan repayment made easy.
EMIs and tenure:-
- Any views about the IDBI bank’s home loan?? They are offering 9% floating …
Along with home loan they are insisting me to opt the “Life insurance cover for home loan liability” it’s the product of “IDBI FORTIES” could you please put some light on this?
Thanks in advanceCommentQuote0Flag