The volatility in interest rates in India has affected borrowers of all types of loans. However, home loan borrowers are the most affected, as home loans are by far the biggest loans quantum-wise. Discrepancy in interest rates between existing borrowers and new borrowers, porting of home loan, stringent rules by lenders and clauses on fixed rate home loans are some of the issues faced by home loan borrowers in the country.
Let’s look at them in greater detail:
One of the most common issues faced by existing home loan borrowers is the discrepancy in interest rates paid by them vis-à-vis a new borrower. While this is a valid complaint, let’s first see what causes this discrepancy. Interest rates on home loans are usually linked to the benchmark rate of the bank (be it the Prime Lending Rate - PLR or the more recently introduced Base Rate, as the case may be). From this benchmark rate, a fixed rate is either deducted (in the case of a PLR) or marked up (in the case of a Base Rate) to arrive at the floating rate on the home loan. Any changes in the benchmark rate will thus automatically result in a change in the interest rate on the home loan as well.
For example, consider a borrower who has taken a home loan from a Housing Finance Company (HFC) at terms which state that his interest rate will be 300bps lower than the prevailing PLR. This was the agreement entered into with the bank at the time of availing the loan. The PLR at the time of granting the loan was 15%, and the interest rate on the home loan thus stands at 12%. Now, if after 2 years, the PLR is reduced by 50 bps to 14.5%, then the interest on his home loan also automatically falls to 11.5%. On the other hand, in order to attract customers, a new borrower may be offered terms with a mark down of 350 bps. As a result, the interest rate he gets on his home loan will be 11% only. This is the reason for the discrepancy in interest rates.
In recent times, in view of the increasing incidence of customers switching banks to avail better rates, the existing borrowers are being offered an option to change to new rates in the same bank by paying a switch fee or a conversion fee. This can