How To Make The Most Of Banks' Interest Rate Cut

Last week, as many as five banks decided to reduce the lending rates in their attempt to facilitate the Central government's affordable housing mission.  As soon as public lender State Bank of India (SBI) slashed interest rate to 8.35 per cent — a reduction of 25 basis points from the earlier 8.60 per cent — for loans up to Rs 30 lakh, private lenders such as Axis Bank, HDFC Bank and ICICI Bank announced they would be providing home loans at similar rates.

However, there are certain terms and conditions to be followed to avail of these new lending rates.

Indiabulls Housing Finance, too, introduced a 15-basis-points reduction to reach the same levels for lending rates. The lender will also be offering home loans to women at an interest rate of 8.35 per cent and at 8.40 per cent to others. This is the lowest interest offered by a bank in the country, considering Indiabulls Housing Finance has not put a cap on the loan amount for availing of the benefits. In case of other banks, the reduced rates are meant for loans up to Rs 30 lakh. The offer remains valid for a limited time period, too.

How this concerns new borrowers

According to the Reserve Bank of India (RBI), loans for the affordable housing sector come under priority sector lending. Under the norms prescribed by the Central bank, you can take loans of up to Rs 50 for a property worth Rs 65 lakh in the six metropolitans. Similarly, you can take loans up to Rs 40 lakh for properties worth Rs 50 lakh for non-metros.

On the other hand, the loan-to-value (LTV) ratio is 90 per cent for loans up to Rs 20 lakh loan and 80 per cent for loans up to Rs 30 lakh. This means you can avail of Rs 18 lakh as bank finance for a property worth Rs 20 lakh while you can get Rs 24 lakh as loan from banks to buy a property worth Rs 30 lakh.

That said, banks that are offering reduced rates only keeping one factor in mind that is loan amount. They are extending you loans irrespective of your income group or the location and value of the property.  Say, you buy a property worth Rs 60 lakh. The above banks will offer you a loan at 8.35 per cent, if you are a woman, and apply for an amount up to Rs 30 lakh.

How this concerns existing borrowers

All existing borrowers can get their loans restructured or refinanced to avail of the benefits. However, they will have to pay processing charges to get their loans restructured with their existing lenders. It is advisable to negotiate with your existing lender to rework the terms of the loan before switching to a new lender. Be mindful of the fact that switching a loan to a new lender is similar to taking a new loan — this means you will have to go through the process all over again.

Should you wait further?

Experts are of the opinion that interest rates are not likely to go any lower and might see an upwards movement in the second half of this financial year. The largesse shown by financial institutions might be bottoming out.

Between January 2015 and October 2016, the RBI reduced repo rate by 175 basis points while urging banks to extend the benefits of this to public. However, banks started following the RBI diktat only after the Central government's demonetisation move led to increased liquidity into the banking system.

Terms and conditions apply

*New rates are different for women and other individuals.

*Most banks are offering the benefits only for a limit period. SBI, for instance, is extending loans at reduced rates only until July 31.

*Opt for a floating rate of interest to avail of benefits if there is a further reduction in rates.

*The lowest interest rate does not mean the cheapest rate. You should also factor in other charges that bank levies on granting you the loan. Those may jack up the overall cost for you.

*Existing borrowers should compare their existing interest rates with the cheapest rate available in the market and should ideally negotiate with their old bank to restructure their loans. This saves them going through the entire loan transfer process.