Shopping for a Loan?

Publication:  Business Standard, Mumbai;   Date: March 8, 2009;

A comparison of some of the interesting rates on offer.

State Bank of India, the country’s largest bank, locks home loan rates at 8 per cent for the first year…Canara Bank freezes home loan rates at 8.25 per cent for the first year and 9.25 per cent for the next five years…

Public sector banks (PSBs) have offered rates of 8.5 per cent for loans up to Rs 5 lakh and 9.25 per cent for loans between Rs 5 lakh and 20 lakh. These loans come with a free life insurance and no processing fee…

With the Reserve Bank of India (RBI) reducing the reverse repo and repo rates by another 50 basis points, there could be more such rate cuts. Repo is the rate at which RBI lends short-term funds to banks. Reverse repo is the rate at which RBI borrows from banks.

It’s no wonder then that banks, especially public sector banks, are coming up with new rates almost on a fortnightly basis. Among housing finance companies, LIC Housing Finance is offering 8.75-9.75 per cent for the entire tenure of the loan. And then there are private sector players as well, but most of them have not been able to cut rates substantially.

A home loan borrower could not be more confused. While there are a lot of choices, the consumer has to decide on the best one for himself. So what should an individual home loan buyer do? Which of the four options – that is, SBI, Canara Bank, public sector offerings, LIC Housing Finance – should one consider.

First, let’s take a look at what’s exactly on offer…
* LIC Housing is offering (for loans up to Rs 30 lakh):
8.75 per cent for the entire tenure. Additionally, there is a 25-basis-point discount in the 9.75 per cent category (between Rs 30 and Rs 75 lakh), if you have an investment-oriented life insurance policy of more than Rs 15 lakh.

* SBI is offering (for loans up to Rs 20 lakh):
8 per cent in the first year,9.75-10.25 for the subsequent four years, 10-10.5 per cent for 5-15 years, 10.25-11 per cent for the balance period, depending on the size and tenure of the loan.

* Canara Bank is offering (for loans up to Rs 30 lakh):
8.25 per cent for the first year,9.25 for the next four years,minimum 10 per cent for the rest of the tenure (for loans up to Rs 30 lakh)

* PSBs are offering (for loans up to Rs 20 lakh):
9.25 per cent for the first five years. But the consumers will get advantage of any downward bias after that, even as there would not be any rise for the entire tenure. Essentially, it means the rate gets locked-in at 9.25 per cent.

If one looks at these numbers, one thing is clear. LIC Housing Finance, by simply locking-in the rate at 8.75 per cent for the entire tenure, is the best offering. Even for higher loans, the housing finance company is offering better rates.

For lower tenures of 10 years, PSBs are not far behind, and only marginally lag behind LIC Housing Finance. But the advantage they have over Canara Bank and SBI is that the rate is locked-in at 9.25 per cent.

The difference however is more pronounced as the tenure of the loan increases. Canara Bank’s new offering makes it more attractive than SBI which, despite offering the lowest interest rate in the first year, takes the last slot.

At the same time, we have not considered prepayment charges, free life insurance cover and other small things offered. SBI has waived off processing charges, whereas there is a 0.5-1 per cent processing charge in other institutions. There is also a 2 per cent prepayment penalty in LIC Housing Finance, SBI and PSBs. However, SBI apparently waives this off in case this is done through savings or a windfall, but not in case you shift the loan to some other bank or refinance the loan.

The savings in interest in LIC Housing Finance and PSU Banks is too sizeable to let it go, when compared to the SBI Loan. The benefits of processing charges and prepayment penalty are not significant for shorter as well as longer tenure loans.

For a loan of Rs 20 lakh, the processing charges would be around Rs 10,000 and prepayment penalty at 2 per cent on an outstanding balance of Rs 10 lakh will be Rs 20,000. However, the interest savings through a lower interest rate will be significant and this increases with the tenure of the loan.

LIC Housing Finance thus takes the cake across tenures with PSU Banks coming close in shorter tenure loans. Make sure you go for a floating rate loan now. If you are able to lock in interest rates between 8 and 9 per cent some time down the line, then it’s time to opt for a fixed rate loan.

The writer is director, MyFinancial Advisor

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