Mar 26, 2012, 11.48 AM | Source:

Pros & cons of opting for a 'switch' on your home loans

Banks are preparing to introduce ‘switch’ facility for their existing home loan borrowers. India’s largest lender, SBI has already launched such a product. State owned lenders including Central Bank of India and Union Bank of India too are likely to offer on similar lines. Mortgage lender HDFC has an existing switch facility.

Saikat Das

With the buzz of interest rate cuts getting louder, banks are preparing to introduce ‘switch’ facility for their existing home loan borrowers. India’s largest lender, State Bank of India (SBI), according to media reports, has already launched such a product. State owned lenders including the Central Bank of India and Union Bank of India too are likely to offer on similar lines. Moreover, the largest mortgage lender HDFC  has an existing switch facility.

What is ‘switch’?

If you had borrowed a home loan at a higher rate but now find, new customers are getting better rates. Hence, you have an option to switch to the new rates by paying an upfront percentage (generally 0.50-1%) of the outstanding loan amount. However, the switch facility does not apply to those who take home loans on all floating basis.

“In a week’s time, we will take a decision at our asset liability committee (ALCO) meeting in finalizing our switch product,” Ram Sangapure, General Manager (retail banking) at Central Bank of India told

“Initially, there may not be many takers of this product. However, we want to be prepared for the future. If interest rates start falling in the next three months, our existing home loan customers can benefit from it. We may be charging one time fee of 50-100 basis points to our customers, who want to avail the new rate,” he said.

Who should avail switch?

At the Central Bank of India, a borrower who had taken a home loan in 2007-08 roughly has been paying 9% rate of interest. During that time, lenders were offering lowest ever rates. For him, it is not feasible to opt for a switch as he will have to pay more. The current rate on home loans is around 11% on an average. Under the present economic condition, rates are not expected to fall drastically.

For borrowers, who have taken loans on all fixed tenure basis, the switch facility can prove beneficial provided the fixed rate is substantially higher. Even home loan buyers under special duel rate schemes can go for switch after the completion of fixed tenure. During 2009, home loans disbursed were at the rate of 14% on an average.

“The switch facility is very instrumental for borrowers who had taken home loans under the BPLR regime and later refused to shift to the base rate system. They have been repaying loans at higher interest rate. For them, it is high time to shift to base rate availing lower rate via switch,” said a retail head from a Mumbai-based public sector bank on condition of anonymity.

In 2010, the Reserve Bank of India had replaced the benchmark prime lending rate or BPLR with the base rate system to bring in more transperancy in lending business.

“We are planning to develop a product on switch facility. Our ALCO will take the final decision soon. We want to stay competitive in the market,” said B Vara Prasad, General Manager (retail banking), Union Bank of India.

The SBI reportedly will charge 1% for conversion from old rate to new rate. It currently charges 10.75% for home loans up to Rs 30 lakh, 11% for loans between Rs 30 lakh and Rs 75 lakh, and 11.25% for upward of Rs 75 lakh.

The HDFC version...

India’s largest housing finance company HDFC however is already offering the switch facility.

This is how a HDFC spokesperson explained to

“HDFC charges 0.50% of the differential between your home loan rate and prevailing rate. For example, if a customer of HDFC is being currently charged 11.5% on home loan and the current rate at which HDFC lends to its news customer is 10.5% then the differential loan rate is 1%. HDFC will charge 0.50% as a one time fee  on the outstanding home loan amount while the benefit of the reduced rate will accrue  each year till the loan is paid up.”

For example, if the outstanding loan is Rs 10 lakh and the balance term is 18 years, then  HDFC will charge  Rs 5,000 as  fees  only once while the benefit of reduced rate will accrue for 18 years.  Therefore effectively the fee charged will be Rs 5000/18 yrs which equals to Rs 23 per month(5000/18yrs/12mths).

Central Bank stock price

On December 01, 2015, at 11:25 hrs Central Bank of India was quoting at Rs 70.85, down Rs 0.2, or 0.28 percent. The 52-week high of the share was Rs 121.00 and the 52-week low was Rs 60.10.

The company's trailing 12-month (TTM) EPS was at Rs 3.79 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 18.69. The latest book value of the company is Rs 94.33 per share. At current value, the price-to-book value of the company is 0.75.

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