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.
  • Language
  • App
  • Subscriptions
  • Specials
  • Sign-In
  • Register
GeStepAhead Travelcafe
moneycontrol.com

Home » News » Business

Mar 26, 2012, 11.48 AM | Source: Moneycontrol.com

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.

Like this story, share it with millions of investors on M3

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.

Post Your Comments

Share Cancel

Saikat Das
Moneycontrol.com

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 Moneycontrol.com.

“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 Moneycontrol.com:

“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).

saikat.das@network18online.com

Central Bank stock price

On April 29, 2016, Central Bank of India closed at Rs 81.95, down Rs 0.2, or 0.24 percent. The 52-week high of the share was Rs 114.80 and the 52-week low was Rs 48.20.


The latest book value of the company is Rs 92.76 per share. At current value, the price-to-book value of the company was 0.88.

Ads by Google

Buy, Hold, Sell ? Hear it first on M3
Pros & cons of opting for a switch on your home loans

See all

Get started using your favorite social network

or

Login using moneycontrol ID

Username
Password

Need help logging in? Reset password.

Don´t have an account? Sign Up

Get started using your favorite social network

or

Simply sign up using this short form

* mandatory

UserName*

Username should be atleast 4 character

Password*

Password should be 8 or more characters,
atleast 1 number, 1 symbol & 1 upper case letter

Alert

Your Password should contain
  • 8 or more characters
  • At least 1 number
  • At least 1 symbol
  • At least 1 upper case letter
Confirm Password*
Email
Already have an account? Login