The Golden rule for any business to flourish is to keep existing customers happy but Home Loan Lenders like SBI, HDFC, AXIS, ICICI etc think otherwise…For any individual, Building own dream house is a major achievement of life but this happiness is short lived if you have built ur dream house by taking Home Loan…Home Loan business is in deep mess right now and all the home loan lenders i.e. both the Banks e.g. SBI, Axis etc and HFC (Housing Finance Companies) e.g. HDFC Ltd, LIC, DHFL etc are taking their existing home loan customers for bumpy ride, reason being existing customers are paying very high interest compared to new customers & are being treated as cash cows for profit by home loan lenders…In a nutshell Banks/HFC are charging differential rates from existing and new customers.
RBI (Banks like ICICI, Axis, SBI etc are regulated by RBI) tried to curb this practice by introduction of Base Rate..6 months back NHB i.e. National Housing Bank (Housing Finance Companies like HDFC, LIC etc are regulated by NHB) came out with directive for HFC’s to treat new and old customers equally by charging same interest rate but the catch was that risk profile of both old and new customer should be same….Risk profile is very very subjective therefore Regulation in this regard is as good as No regulation. HFC can easily give an excuse that Risk Profile of Existing Customer is not same as that of New Customer therefore uniform interest cannot be offered to Existing Customer…You can click on following link to check out the NHB directive.
At the same time while introducing Base Rate, RBI forgot that Banks charge mark up on Base Rate, which is controlled by Banks & can be easily tweaked whereas HFC’s offer discount on BPLR, which again is controlled by HFC. Effectively introduction of Base Rate by RBI has not served any purpose. Infact banks are not moving base rate as per RBI policy (which i highlighted in my previous post)..You can click on following link to read more on this
For existing customers, the discount or Mark up remain fixed throughout Loan period, which is the root cause of this problem. Take e.g. if i took loan from Bank A & bank offered me mark up of 1% over base rate of 10% at the time of availing loan, which implies my Rate of Interest (ROI) is 11%…Now in order to remain competitive, After 6 months bank may offer mark up of 0.5% to new customers. Assuming Base Rate being same, New Customer is paying 10.5% and Old Customer is paying 11% i.e. New Customer is paying lower interest rate compared to Old Customer.
The point is banks and HFC’s are making fool of old customers, it’s not the case that u can’t lower your interest rate but it comes with a cost…Recently SBI introduced a scheme that Old Customers on high interest rate can migrate to existing interest rate by paying 1% on outstanding amount as transfer fees therefore if ur loan outstanding is 20 Lac then u need to shell out 20k for shifting to lower interest rate…Similarly HDFC Ltd charge differential interest on loan outstanding to increase discount i.e. to lower interest rate e.g. If old interest rate is 11% and new Interest rate offered is 10.5% then u need to pay 0.50% on loan outstanding in order to shift to lower interest rate.
Before taking decision to shift to lower interest by paying fees, my only request to u is just to check how much benefit u will get from this shift…Normal tenure of Home Loan is just 8 years i.e. more than 90% Home Loans are closed in 8 years…Just to take e.g. if i am shifting from 11% to 10.5% by paying 10k plus on outstanding loan of 20 Lac then i need to check when I will breakeven e.g. if on average basis my per month interest burden reduced by 500 Rs then I will take approx 20 months to recover my 10k which i am paying upfront and my real benefit of this shift will only start after 20 Months…May be within 20 months i will prepay my loan then my break even will further increase to say 36 Months and by then may be i will close my loan so psychologically i am happy today that my interest is reduced but it comes with cost and u will take at least 2-3 years to recover the cost which u r paying upfront that is why I mentioned banks or HFC’s are making fool of customers.
Now u must be wondering if everyone is following this practice then whom shall we trust, Honestly my personal opinion is still u can trust banks and to be specific u can trust SBI… Reason Bank’s Home loan is linked to Base Rate & secondly Average cost of Borrowing of banks is much lower compared to Housing Finance Companies like HDFC etc becoz of CASA contribution. Only catch is, its very difficult to get loan from SBI as SBI don’t need customer but customers need SBI…SBI’s plate is already full and getting Loan from SBI itself is a big achievement…You can try other banks like Bank of Baroda, Axis Bank etc. In nutshell as a new customer you will be treated as King and as a old customer you will be cursing ur decision of availing Home Loan.
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