‘Buying the spread’ will take your home loan floating interest rate back to what it was over a year ago.
A quarter-on-quarter hike in home loan rates for the past 18 months has made things difficult for existing home loan customers. Home loans have now touched an eight-year high following the RBI’s 50 basis point hike on its repo rate (the rate at which the RBI lends money to banks).
Financial planners say the series of hikes affected the budgets of most families as 90% of new borrowers opted for floating rates during the low-rate-teaser-rate regime.
This means a small fraction of the fat EMI you pay goes towards the repayment of the principal amount while the bulk goes in interests. With interest rates on housing loans breaching the 12% per annum mark, existing borrowers face the prospect of either paying the same EMI for the rest of their lives or liquidating the nest-egg fund to pay a part of the housing loan upfront.
So, what should you do to make things work in your interest. Buy the spread. Housing finance companies do not advertise it because it does not translate into profits for them. When you buy the spread, your home loan interest effectively moves back to the comfort zone in which it was a little over a year ago.
Suppose you took a loan at 10% per annum interest a couple of years ago. The prevailing prime lending rate (PLR) at that time was 13% per annum. But you were given a spread of 3% in keeping with the loan rates prevailing then. Now, the PLR has shot up to 15.5% and your interest rate has proportionately gone up to 12.5%.
“Buying the spread from your home finance company reduces your effective rate of interest to that extent,” Harsh Roongta, the CEO of apnapaisa.com, said.
“You should dump your home finance company and go to a new financier if the company does not give you the rate it is offering to new customers.”
Existing customers can bring their interest rates at par with that of new customers by way of buying the spread. The floating rates now range between 10 and 11%. The fixed rate now is more than 13% with most housing finance companies.
Financial planner Anantram Rao said those with floating rates could get a further spread of 2% by paying a fee of 1.5% of the principal outstanding amount. “This will immediately bring down you interest to 10.5%,” Rao said. Also, the fee paid for the spread can be recovered in less than six months, he said. “The benefits run into lakhs for the remaining repayment period.”
Ever since the new PLR-based computation method has come into force, buying the spread is even more effective, a senior official from a leading home finance company said. “In 2010, the PLR became dynamic. Call it coincidence, even rates started shooting up pushing the PLR by almost 200 points in little more than a year,” he said.
At present, the PLR is 15.5% and it is effectively the prevailing interest rate as well. The interest rates have gone up almost 25% in the past one year and existing borrowers are burdened with a proportionate increase in their outstanding amount because of either higher EMI or increased tenure.
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