Housing Development and Finance Corporation (HDFC) recently cut the interest rate on its floating rate home loan to 10.5%. The offer is valid till October 31.
MUMBAI: Housing Development and Finance Corporation (HDFC) recently cut the interest rate on its floating rate home loan to 10.5%. The offer is valid till October 31.
All new disbursals will now be charged interest at 10.5% per annum. In addition, even those whose floating rate loan proposals have been cleared but not disbursed will get the loan at 10.5% interest.
That is the simple part of it. The interest rate being offered by HDFC is extremely attractive and individuals who are currently paying floating rates of 11.5-12% with new generation private sector banks could well look to refinance their home loan.
Let us say you have a loan outstanding of Rs 30 lakh; the remaining tenure of the loan is 15 years and you are currently paying an interest of 12% on your floating rate loan. The equated monthly instalment (EMI) for this works out to around Rs 36,000 per month.
You can look to refinance your home loan from HDFC, which is currently charging 10.5% on its floating rate loans or from some public sector banks, which are also charging similar rates.
Refinancing essentially involves taking a new loan at a cheaper rate to repay the original loan.
Typically, a lender would levy a 2% prepayment charge when a home loan borrower decides to prepay his original loan by borrowing from another bank or housing finance company. On your loan outstanding of Rs 30 lakh, this works out to Rs 60,000.
So, is it worth getting a refinance in the first place?
Currently, the borrower needs to pay an EMI of Rs 36,000 to repay his loan outstanding of Rs 30 lakh over a period of 15 years. The rate of interest he is paying is 12%. After refinancing, the rate of interest comes down to 10.5%.
On this, if he were to continue paying his earlier EMI of Rs 36,000, he would be able to repay the amount outstanding of Rs 30 lakh in 150 months, i.e. 12.5 years — 2.5 years or 30 months less than the original period of 15 years. And what is the amount saved? A whopping Rs 10.8 lakh (Rs 36,000 X 30 months)!
It sure makes sense to take refinance then, assuming, of course, that the floating interest rate will continue to stay at 10.5%.
Also, as the name suggests, floating rates can change. They are linked to what is known as the benchmark prime lending rate (BPLR) of the bank or housing finance company from which you take the home loan.
Hence, if the BPLR is 13.5% and floating rate home loans are at a discount of 1.5% to the BPLR, the floating rate works out to 12%. Therefore, whenever the BPLR is raised, the interest to be paid on the floating rate home loan goes up, or vice versa.
Given this, the interest rate on a floating rate home loan can vary. Let us say interest rates go up by 1%. Then, the floating rate loan charging 12% will go up to 13% and that charging 10.5% will go up to 11%. Even so, a difference of around 1.5% is likely to be maintained.
Thus, even if interest rates continue to go up, you are better of refinancing your home loan.
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