Opt for regular floating rate

While there is a cost involved for converting dual-rate loans into regular floating rate ones, that would still result in a hefty saving

A large number of homebuyers who had opted for home loans under the dual-rate schemes are soon going to see a substantial rise in their rates. For instance, borrowers from HDFC are staring at a 275-basis-point (from nine to 11.75 per cent) increase, which would translate into an over Rs 3,500 higher equated monthly instalment (EMI).

Borrowers, however, have been presented an option: Convert to the existing floating rate of 10.5 per cent by paying 0.5 per cent of the amount due. An interesting move, considering they would be benefitting by 125 basis points.

While HDFC offers the conversion option to other borrowers as well, this would go down especially well with those who had opted for dual rate.
 

COST OF CONVERSION Experts say switching to a regular floating rate would be cheaper
	Loan size (Rs lakh)	Tenure (months)	Rate of Interest (%)	EMI (Rs)
	30	120	8.25	36,796
After March 2011	28.5	111	9.00	37,925
After March 2012	26.4	99	11.75	41,823
Regular floating	26.4	99	10.50	40,225

Rise in EMI if converted at 11.75 per cent	Rs 3,898
Rise in EMI if converted at 10.5 per cent	Rs 2,300
Processing fee 0.5 per cent	Rs 13, 217
Savings	Rs 1,598
Source: Apnapaisa.com

When the dual-rate scheme was launched, HDFC had offered a fixed rate of 8.25 per cent for a year, up to March 2011 and nine per cent from March 2011 to 2012. Under this scheme, the repayment rate will be fixed for a few years and then a floating rate would apply. In HDFC's case, dual-rate home loans will be converted to floating-rate ones. The rate, which would be fixed, will be linked to the company's, along with the spread.

ICICI Bank also offers dual-rate home loans to its customers. The floating rate would be linked to ICICI Bank Base Rate (I-Base), and the margin would be decided at the time of sanctioning the loan.

When dual-rate home loans are converted to floating rate ones, the EMI increases, because of the pre-decided margin charged. In HDFC's case, it would have been 11.75 per cent, whereas its existing rate is 10.5 per cent.

So, should you convert to the floating rate under the dual-rate home loan or move to a regular one before the conversion date? Financial planners say switching to the regular floating rate is better, as you will end up paying a much lesser EMI —even with the 0.5 per cent processing fee.

"It is advisable to switch to the regular floating rate now, as it is cheaper," exhorts Harsh Roongta, CEO, apnapaisa.com.

So, here is how it works out. Suppose you had taken a loan of Rs 30 lakh from HDFC for a period of 10 years in July 2010. The interest rate was 8.25 per cent until March 2011 and nine per cent until March 2012. The initial EMI would be Rs 37,796, which will increase to Rs 37,925. Dues on the principal at the end of March will be Rs 26.4 lakh. If your interest rate is reset to 11.75 per cent, your EMI will jump to Rs 41,823 (up Rs 3,800).

If you opt for conversion at 10.5 per cent interest rate, your EMI will be Rs 40,025 and it will translate to a net effective saving of Rs 21,576 a year. Even if you pay 0.5 per cent as a one-time processing fee, you will need to pay just Rs 13,217. But, you can recover this within eight months.

Suresh Sadagopan, a certified financial planner, says it is a good option. "The quantum of savings will vary from case to case. Though you will make up the processing fee over a few months, you will have to work out how much savings will be made to see if it is worthwhile to make that switch," he explains.

Higher the loan amount, higher will be the interest rate levied. So, calculate accordingly, and see how much you will save if you switch to a regular floating rate. See if other banks are offering lower interest rates. You need not worry about paying a penalty on foreclosure of loans, as it has been stopped in accordance with the Reserve Bank of India guidelines.