Should you switch your home loan to SBI?

Though State Bank of India (SBI) has cut rates on home loans by 25 to 85 basis points (bps) across tenures (bank's present discount to its card rates is about 25 bps), it's a bit early for home loan borrowers to switch their lender.

Wait for 10-15 days, as other lenders are likely to follow suit. Borrowers can also use SBI's example to bargain with their respective lender for better rates. It is most likely that their lenders would agree, as it is in their interest to retain a borrower with a good repaying record, say experts.

For home loans up to Rs 30 lakh, SBI has reduced the interest rate from 10.75 per cent to 10.25 per cent and to 10.4 per cent for loans above Rs 30 lakh.

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Earlier, for loans between Rs 30 lakh and Rs 75 lakh the interest rate was 11 per cent and for loans above Rs 75 lakh, it was 11.25 per cent.

The revised equated monthly instalment (EMI) per Rs 100,000 at the rate of 10.25 per cent for a loan tenure of 30 years would be Rs 897, against the prevailing EMI of Rs 934, said an SBI statement.

The waiver of the prepayment penalty for floating rate home loans has made switching lenders to take advantage of lower rates an attractive proposition for borrowers.

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But that should not be the only criteria for switching your lender. The difference between old and new rates should be at least 75-100 bps for the switch to make commercial sense, as the procedure is cumbersome.

Harsh Roongta, CEO, Apnapaisa.com, says other lenders might also cut rates and it is best to wait for 10-15 days. The biggest advantage is that there is no prepayment penalty on floating rate loans. However, there will be a nominal processing fee and a small fee on creation of security.

Even if borrowers are getting the new loan at 50 bps less and if only two years are left for repayment, switching to a new lender will help, as the rates offered by SBI are very competitive, Roongta says.

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Assume, for instance, a borrower took a floating rate loan of Rs 80 lakh, at an interest rate of 12 per cent and tenure of 30 years. The loan has been repaid for five years.

The old EMI is Rs 82,289 and the amount due is Rs 78,13,057. If the loan is reset at 10.5 per cent, the new EMI is Rs 76,000. The difference works out to Rs 6,000.

Vipul Patel of Home Loan Advisors, an independent mortgage advisory firm, is advising his customers to use SBI's rates to bargain for a better deal with their respective lender. If the lender does not agree to lower the rates, then the borrower must switch to a new one.

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"Even if your bank does not bring down rates to 10.25 (SBI's charge), they might at least reduce it to 10.5 or 10.75 per cent. If your current rates are 11 per cent or above, even this much of a reduction will help," he says.

While switching the loan, borrowers should try to keep the monthly repayment constant or increase it, so that the period of the loan does not increase.

However, unlike home loans, it does not make sense to switch your car loan. The prepayment charges are huge and the loan tenure is short in most cases (three to seven years).