Better deal: Home loan should not be a burden for the purchaser any more.
| The RBI has made it clear that any change in the base rate will apply to new as well as old housing loan customers |
In the past one decade, under the ‘BPLR (Benchmark Prime Lending Rate) regime', banks and HFCs have manipulated the provisions to suit to their needs at the cost of existing customers. But the existing borrowers can cheer now, as under the ‘base rate' regime, to be effective from July 1, 2010, things are expected to change for the better.
It is reported that the Reserve Bank of India, in its guidelines on the ‘base rate' (the new benchmark that banks will use to price loans), has made it clear that any change in the base rate will apply to new as well as old customers.
The ‘base rate' system would be applicable to all banks and as such the housing finance regulator (National Housing Bank) may issue separate guidelines for home finance companies (HFCs) to ensure transparency in fixing interest rates on home loans.
What is base rate?
Due to the anomalies found in pricing of various loans under BPLR method and due to public outcry against non-transparent factors used in pricing of loans, the Reserve Bank has come out with a new method of fixing interest rates on various loans, called the ‘base rate' method.
In this, banks will have to consider average cost of funds and add the profit margin to it. However, credit risk, tenure (loan repayment period) and other influential factors will be loaded to the base rate. The RBI has made it clear that there has to be a transparent method of fixing interest rates to be charged on each loan product.
The RBI will further have periodical supervisory review or scrutiny to ensure proper pricing on loans and transparent factors used to calculate pricing.
Under the ‘base rate' regime, the best part is banks will not be allowed to offer loans at interest less than the base rate fixed, which will have to be reviewed at least once in a quarter. Under floating rate loans, banks may not be allowed to offer teaser loans (luring new customers with lesser interest rate initially but charge them higher interest later on) and banks will not be allowed to charge different rates for old and new customers.
As per RBI guidelines, ‘base rate' method will have to be applied for not only new loans and loans coming up for renewal from July 1, 2010, but for existing loans also.
For existing borrowers, banks will have to provide an option to switch over to the new system before the expiry of the existing contracts, on mutually agreed terms. However the RBI has made it clear that the bank cannot charge any switch-over fee for converting an existing loan from BPLR to the ‘base rate' system.
The ‘base rate' may vary from one bank to another as RBI has allowed banks to choose any benchmark to arrive at the base rate for different loans, but the factors considered to arrive at the rate will have to be transparent and should be disclosed to the public.
No more balance transfer
In the recent past, many home loan borrowers have opted for balance transfer of their home loan account from one bank to another, as they found, their bank has been charging 2-3 per cent more interest than the prevailing rates offered by other banks.
Such borrowers have not only paid 2-3 per cent as pre-closure charges on the outstanding loan amount but also spent considerable amount on processing fee and insurance premium etc.
Since teaser loans are being continued to be offered by major banks and HFCs (Home Finance Companies), you may be thinking of shifting your home loan account to another bank/HFC. Hold on till July 2010, when the ‘base rate' regime starts and you may get an opportunity to shift to the ‘base rate' without spending any amount.
Let us consider the case of Mr. Rao who is paying an interest of 11.5 per cent on his home loan and is getting lured by some banks offering him 8-8.25 per cent interest for one year and later on 9-9.5 per cent, under floating rate schemes.
It is advisable for him to wait up to July 2010, when the ‘base rate' scheme would begin and the rate may be fixed at 8-8.5 per cent. It is likely that home loans for all customers (new and old) would be offered at base rate plus one per cent.
Hence Mr. Rao may get an opportunity of shifting to the base rate scheme having 9-9.5 per cent interest on his home loan, at no extra cost.
It is hoped that the ‘base rate' system will enhance transparency in lending rates and usher a new beginning in the financial system of the country.
(The author is a Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com)
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