Moving to base rate in home loans?

It may not make sense if you have only a couple of years left or are on teaser rates.

In the past month, many existing home loan borrowers would have found their lending rates rising. Many banks, including State Bank of India, ICICI Bank and Punjab National Bank, have raised their benchmark prime lending rates (BPLR). Borrowers will now face either of these two situations — rise in equated monthly instalments (EMIs) or tenure.

Banks followed the BPLR rate regime till June 30. Since July 1, the base rate regime has come into force, the rate below which banks cannot lend. Existing borrowers can continue with the old PLR-linked loan rates or shift to base rate-linked rates. Many banks are already nudging customers towards the base rate regime because they do not want to maintain two records, one for the new and another for the existing customers.
 

RISING TREND
Bank	Hike in BPLR (%)
SBI	1.00
PNB	0.75
ICICI Bank	0.50
Axis Bank	0.50
Bank of India	0.50
IDBI Bank	0.50
Bank of Baroda	0.50
Canara Bank	0.50
HDFC Bank	0.25
Kotak Mahindra Bank	0.25

Experts say it makes sense to shift. With the Reserve Bank of India mandating that there can be no charges on shifting from existing to base rate, borrowers should take advantage of that.

“The basic advantage here is that unlike PLR, the base rate is the minimum lending rate for banks and, hence, it can be raised only to a certain extent. Otherwise, banks will lose business. Also, the base rate will be stickier, so rates will go up slowly,” says K V S Manian, head, retail banking, Kotak Mahindra Bank.

However, before shifting, take these points into consideration:

No reduction
This is simply because the bank will not treat the shift as a fresh loan. With the contract remaining the same, you will pay at the same rate. Say, you currently pay nine per cent, or 300 basis points less than BPLR. After the shift, the rate sheet would say eight per cent (base rate) plus 100 basis points.

End of tenure
It also does not make sense if you are in the last two-three years of your loan repayment because you would largely be making principal payments. For instance, you had taken a Rs 50 lakh loan at 9 per cent for 15 years. If you are in the last two years of repayment, the outstanding amount is Rs 10,67,684. In an EMI of Rs 50,713, the principal payout is Rs 42,388 and interest Rs 8,326.

Teaser loans
Shifting may not be such a good idea if you have opted for teaser loans, where the rates are around 8- 8.25 per cent. “A teaser rate customer will have to forego all the advantages he is likely to get in the initial years of a teaser loan. It will, anyway, be reset after three years and be linked to the base rate. So, it is not a great idea,” says C S Jain, head-retail banking, IDBI Bank.

Renegotiating the rate
While shifting to base rate, one could even consider renegotiating and shifting to the existing rate of interest. But renegotiation comes at a price. Since the bank treats these as fresh loans, they will charge you 1.5-2 per cent on the outstanding principal.

But it should depend on the rate of interest you are on and the remaining tenure. If you are in the first couple years of the loan tenure or the last few years, renegotiation may not be smart. In the last couple of years, the rate of interest has been falling, so you are most likely sitting on 9-10 per cent – the existing rate. In the latter case, you have already paid the interest cost. Customers stuck in the middle band may try to renegotiate, because the rate there might be very high.