Housing finance companies, where the practice seems to be more widespread, and even some banks, are reaching out to borrowers, giving them the option to reduce interest rates by paying a fee, either ad hoc or a percentage of their outstanding loans
MUMBAI: Lured by the falling interest rate scenario and the promise of reduction in home loan rates, borrowers are in a fix on whether to pay a fee now for a cheaper rate or wait for change in the benchmark for automatic transmission.
Housing finance companies, where the practice seems to be more widespread, and even some banks, are reaching out to borrowers, giving them the option to reduce interest rates by paying a fee, either ad hoc or a percentage of their outstanding loans.
However, faced with the covid-19 uncertainty, borrowers are unsure whether to use the option.
While the interest rate changes on the new repo or other external benchmark-linked loans for banks happen every quarter, the changes for housing finance companies take longer. The reason behind it is that while banks have moved to the repo rate as the benchmark since October last year, mortgage companies base their rates on an internal benchmark of cost of funds.
For instance, while State Bank of India’s (SBI) repo linked rate came down by 40 bps after an equivalent rate cut by RBI, LIC Housing Finance’s prime lending rate (PLR, its benchmark) has been stagnant since January 2019 at 14.7%, showed data from Myloancare.in. To be sure, while banks charge a spread over their benchmark rate, mortgage companies calculate interest rates by subtracting a spread from their PLR.
For Anirudh B Balotiaa, a user experience researcher, the option was to pay ₹5,900 to HDFC Ltd in exchange for a reduced interest rate. According to Balotiaa, while the offer was enticing, he was not sure why he has to pay a fee for a floating rate loan. Another borrower, who did not wish to be named, said she received an email from her mortgage lender that it could reduce the interest rate by 80 basis points (bps) for a similar fee paid upfront.
Housing finance companies Mint spoke to said they charge a fee only when a customer seeks a change in interest rate before their reset date. All floating rate loans have a reset date when the prevalent interest rates replace the existing rate for that particular borrower.
“The fee is charged only in case of change of spread initiated by the customer or there is a request for reduction out of turn by the customer and the fee is between ₹2,500 and ₹5,000, plus taxes," said a spokesperson for HDFC Ltd, adding that in case of retail prime lending rate change (RPLR) change, the change in rate does not entail any fees and the impact of rate change is automatic.
A spokesperson for LIC HF said that in order to give the customers the benefit of lower rate of interest the company is rewriting loans of customers based upon their request. “Under this special dispensation, the spread i.e. mark down point from our reference rate (LICHFL Prime Lending Rate) is also altered so that the benefits gets passed on to the customer," the spokesperson said.
PNB Housing Finance said it will not be able to respond due to a silent period ahead of its quarterly earnings announcement. An email sent to RBI remained unanswered as well.
Analysts believe that mortgage companies are slow in passing on interest rate reductions because of difficulties in lowering their cost of funds. Supreeta Nijjar, vice-president, financial sector ratings, Icra said the cost of funds for housing finance companies (HFCs) have not come down as they have faced a lot of challenges in raising fresh funds, except the top ones.
“Definitely, as of now the lending rates for HFCs are about 25-50 bps higher for the same category of borrower as compared to a bank. However, it has been noticed that the processing and the loan sanctioning time for HFCs are faster than some banks and therefore many customers may be willing to pay a premium for better service," said Nijjar
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