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 installment 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 fixedrate 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.
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 fixedrate 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.
Shifting Base
You can call your bank’s customer care service or visit your branch to express your intention to switch over to base rate. There is no standard format for making such an application. Either the bank will provide an application form or ask you to write a letter mentioning the details of your loan and your willingness to move to the new system. Once the new terms are accepted, the bank will facilitate the transition to base rate.