Tuesday, December 16, 2008

Bargain, get a cheap home loan from banks

The Reserve Bank of India has lowered the repo rate (rate at which the central bank lends money to other commercial banks) by 100 basis point from 7.5 per cent to 6.5 per cent.

Following this, ICICI Bank announced a reduction in its home loan rate from 13 per cent to 11.5 per cent for loans up to Rs 20 lakh. This new rate is applicable only for new customers. Other banks are likely to follow suit.

Existing customers: Bargain!

"If your bank offers home loan at more than 11 per cent, look towards other banks who offer lower rate of interest," says home loan expert Harsh Roongta.

While negotiating for lower interest rates from the present bank or the new bank, it will work in your favour to have the following brownie points:

1. A spotless record of repayment since your loan commencement.

2. Your income has either remained stable or has increased.

3. You have not acquired any fresh liability.

Penalties and fees

It's worth it to pay up the prepayment penalties and loan processing charges if the new loan will come at less than 11 per cent, say experts.

The numbers

Old home loan: Rs 20 lakh

Floating rate interest: 13 per cent

Tenure: 20 years

EMI would have been Rs 23,726 per month.

Now, assume that you have paid EMI for 2 years.

Outstanding loan amount: Rs 19.47 lakh

Interest rate: 11 per cent

Tenure: 18 years

EMI: would be Rs 21,259

Total switching cost (including prepayment penalty and processing fee for the new loan) would be Rs 48,683.

Read: Don't let higher EMIs ruin your budget

Read: Should I prepay my home loan?

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