Re-negotiate your Home mortgage!

A few days ago India’s largest bank dropped its interest rates on home loans to 8%. This is nothing short of sensational – considering that at the same time one of the top Indian groups (let us say Bluest of Blue) are willing to borrow in the same market at 12% per annum!

However, I have been asked by too many people “Is this a good time to buy a house?” – Now that interest rates have dropped.

My answer has been a little guarded. If you anyway needed a house, there is not much choice, unless you are willing to rent. However if you are thinking of ‘investing’ in a house, think again. The rent yields (if you decide to let it out) will be much lesser than in shares or bonds. Also  buying a house because interest rates have dropped is like shifting from an Indica to a Toyota Corolla because petrol prices have dropped by Rs. 5!
A house has many cost components – cement, land, architecture, fittings, interest, etc. so to buy a house just because interest rates have dropped does not make sense.

However what should you do if you already have a loan?

If you have a loan with SBI, and on a floating rate, ensure that you get the new rates for your loans. Just analyze the loan statement (demand one if you do not have one) and see how quickly they were revising it upward! Demand that you get the new rates immediately.

If you are on a fixed rate or a floating rate, but with another bank, rush to SBI and avail of the lower rates. Of course before doing this, you will have to ask your lender whether they are planning to reduce interest rates or not. If you think they are planning to reduce interest rates in the near future, you could stay on with the same financer.

Many people who have signed up for a floater, do not know the meaning of the word floating interest rates. Here is what you look for in a good floating rate:

1.    To what is the rate linked: Except one foreign bank, most lenders just give you a ‘floating rate’ without telling you to what it is linked. Or it is linked to their own ‘prime lending rate’. This is not a good thing. Ideally the floating rate should be linked to a rate that is publicly available benchmark. In such a rate there is no fear of the bank manipulating the rate to suit themselves. Can they manipulate their own ‘prime lending rate’? The answer is yes. And they can fix up a prime lending rate and lend to some customers at a discounted rate! However if it were linked to a ‘market determined rate’ which is publicly available, you can feel better and safer about the computation. A good example is the YTM on the 10 year G-sec.
2.    What is the frequency of reset: If the rates are to be reset monthly, quarterly or half yearly, at least as a borrower you should know this. It cannot happen that the reset is 10 days when interest goes up and 6 months when interest goes down.
3.    Method of intimation: the bank should notify you immediately by post, email, sms, – any method of intimation agreed to by you, so that you know that the re-set has happened.
4.      You should understand what you are signing! Which means if the agreement says “4% over the YTM of the 10-year G sec” – you know it means:

If the Government of India borrows money at 6.75% interest rates, you will pay 10.75% interest for that quarter (assuming a quarterly re-set). And this message should be sent to you in an email / letter as chosen by you.

Will all this happen? It is a clear function of how hard you push. The customer was never king. The informed customer is king. Has always been.

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2 Responses to “Re-negotiate your Home mortgage!”

  1. Will it a good decision to move after paying 2-3% prepayment charges, when the reduced rate of 8%, as i understand is valid only for 1st year. thereafter it reverts to something around 10%.
    For your views and advise

    thanks n regds

  2. no it may not make sense at all – the gap is too small, the penalty high, and yes u are right 8% is a gimmick. However u shd renego with your existing lender to reduce the rates, – and all those things which i hav said in the article…

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