This month, a few of the major banks and one housing finance company (HFC) reduced interest rates by 15-20 basis points (bps) for home Loan up to Rs 30 lakh. For instance, State Bank of India (SBI), the country’s largest lender, cut the interest rate on home loans by 25 bps, to 8.35% from 8.60% for salaried individuals. One basis point is one hundredth of a percentage point.

Meanwhile, ICICI Bank Ltd reduced interest rates on loans below Rs 30 lakh by 0.3%, to 8.35% for salaried women and to 8.40% for other individuals. Similarly, Housing Development Finance Corp. Ltd (HDFC), the country’s largest mortgage lender, cut interest rates to 8.35% for women borrowers and 8.40% for other individuals. On 18 May, Axis bank had reduced home loan rates by 30 bps. The bank has revised its rates for salaried segment to 8.35% for up to Rs 30 lakh loan. If you are a self-employed, the rate would be 8.40%. Rates for home loans of up to Rs 30 lakh are now at least 15 bps lower than that for higher amounts.

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Here is what the change in the interest rate means for you

Affordable housing loan
The Reserve Bank of India has prescribed norms for housing loans that are eligible for priority sector lending. Under affordable housing loans, the RBI also includes “housing loans to individuals, up to Rs 50 lakh for houses of values up to Rs 65 lakh located in the six metros and Rs40 lakh for houses of values up to Rs 50 lakh in other centres of purchase or construction of dwelling unit per family.
In an RBI press release issued on October 8, 2015, the loan-to-value (LTV) ratio for Rs 20 lakh loan is 90%. For loans up to Rs 30 lakh, the LTV ratio is 80%.
Is it for you?
The definition of affordable housing differs based on factors such as income group, location and value of property. However, when it comes to home loans, banks are only considering the loan amount. The revised rate of 8.35% for women (and 8.40% for other individuals) is applicable for all home loans up to Rs 30 lakh, including under PRADHAN MANTRI AWAS YOJANA (PMAY). There is no condition on the property value. But the maximum loan amount will be 80% to 90%, depending on property value.
If you have an outstanding loan amount of Rs 30 lakh on an earlier loan of Rs 60 lakh you can lower the interest rate by paying a conversion fee.
SBI, too, has a similar view but the caveat is that it is a limited period offer. Remember that this switch comes at a cost and the usual home loan charges will apply. The customer has to pay a nominal processing fee. However, the processing fee for balance transfer of home loan has been waived. The customers has to pay legal and valuation fees, which are charged at actual.

What should you do?
If you are a new borrower and are looking to take a loan of up to Rs 30 lakh, since major financial institutions are offering similar rates you should compare other parameters such as processing fee and legal valuation fee. Also, remember that some banks are offering these rates for a limited period only. If you are an existing borrower, you need to do the math to see if it makes sense to switch the loan to a new lender. But before taking that step, negotiate with your existing lender for a lower interest rate.
Say, you have an outstanding loan amount of Rs 30 lakh at 9.5% interest rate and the remaining tenure is 15 years. Considering that everything else remains constant, if you move to an 8.35% interest rate, you will end up saving Rs 3.68 lakh. In this example, your EMI per lakh gets reduced from Rs1, 044 to Rs976.
If you factor in other costs such as processing fee, administrative cost and other charges, the overall charges may end up in the range of Rs10, 000 – 12,000. These charges vary according to banks.
Any amount of savings is good. As a borrower, you should be aware about the falling interest rate. After factoring in the conversion cost, if you still see some saving, you should definitely move to a lower interest rate loan. You should also remember that switching your loan to another lender is equal to a new loan. To get a sense of the interest rate and other charges, you can check individual bank websites and loan aggregator portals.

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