Borrowers get best rate option on home loans

On Tuesday HDFC announced its offer of dual-rate on home loan, thus the aspiring home buyers are getting good options.

Before the State Bank of India (SBI) offer of 8 per cent on home loan was termed as ‘a gimmick’ by the Housing Development Finance Corporation (HDFC) has entered the dual-rate bandwagon with its ‘festive’ offer of 8.25 per cent for home buyers.

The HDFC bank loan offer will be valid till January 31, 2010, is expected to offer more options to the potential home buyers. Besides HDFC, there are number of players offering attractive home loan rates.

According to the figures, Bank of Rajasthan (BoR) is offering the lowest rate of 7.5% per annum which is 50 basis points less than the SBI offer. The Development Credit Bank is giving offer of 7.95% for the first year. The other players are such as Axis Bank Power Plus, State Bank of Bikaner and Jaipur and Canara Bank are offering 8 per cent rate for the first year.

According to industry experts for home buyers the first year rate should not be most important factor because the normally the home loan tenure is of 15 to 20 years. Therefore, if the low rate is offered in the first few years and later on increases, the home buyers will find themselves under serious financial problem.

SBI is offering 8 per cent for the first year and 8.5 per cent for the second and third year subsequently the rate will be 2.75 per cent less than its benchmark rate or the State Bank Advance Rate from the fourth year onwards.

On the other hand HDFC’s dual-rate offer is equivalent at 8.25 per cent till March 2012, after that at loan will be offered at floating rate which will be 500 basis points below their benchmark.

Suppose you choose to take loan of Rs 25 lakh for 20 years from BoR, the EMI (equated monthly installment) for the first year will amount to Rs 20,140. While for a similar loan amount from SBI and HDFC the first year monthly EMI will amount to Rs 20,911 and Rs 21,302, respectively.

Thus by taking loan from BoR you will save around Rs 771 per month (Rs 9,252 a year) and Rs 1,162 per month (Rs 13,944 a year) for SBI and HDFC, respectively. The figures are not quite significant as the home loan is for a long tenure. Moreover in the second and third year, HDFC (till March 2012) will charge 8.25 per cent, while BoR and SBI are offering 8.5 per cent for the same.

Hence before taking the final decision on best rate, one has to look at the costs such as processing fee. BoR charge 0.5 per cent to 1 per cent processing fee of the loan amount whereas, HDFC charge 0.5 per cent and SBI nil.

While a person takes a loan of Rs 25-lakh, then the processing fee charge by the BoR will amount to Rs 12,500 to Rs 25,000. However on loan taken from HDFC the fee will be Rs 12,500, and for SBI, the cost is zero. Thus the person will not save anything in the first year if the loan is taken from BoR due to higher costs.

Subsequently from the fourth year, the applicable floating rate of the bank’s existing cost of funds and the benchmark rate will be charged. Although it is not easy to predict the future rate of interest but to get some idea about the EMI one can use current benchmark rates and calculate the average rate of interest per year.

After the calculation the figures will be something like this. BoR is offering the best rate at 8.53 per cent, followed by HDFC and Axis Bank at 8.63 and 8.65 per cent, respectively. At 8.76 per cent, SBI’s rate comes fourth.

Therefore the potential home buyers get a lot of options. At present they can pay low EMIs and pay higher when their incomes improve after three years.

Moreover it also provides good option for the borrowers who want to shift their high-cost on the existing loans to cheaper options. Most of the existing borrowers are paying excess of 10 per cent on their loans, so for them it is the right to shift. But they have to work out the cost of shifting as it involves a prepayment penalty.