Drive Home The Advantage

Home buyers can exploit the interest rate differential between public and private sector banks to register substantial savings over the loan tenure

THE government's recent move to provide home loans at cheaper rates has led to a differential in interest rates offered by public sector and private banks. We at ET Intelligence Group, decided to carry out a quick analysis of the interest rates offered by different banks to quantify the benefits that might accrue to existing and new home buyers.
    In most cases, the public sector banks/home loan financing companies (HLFC) are offering lower interest rates compared to their private sector counterparts. This is beneficial to two categories of home buyers. One is the existing homebuyer who can transfer their current loans from a private bank to a public sector bank. The other category is that of new buyers who can choose either from public or private sector banks or from HLFCs like HDFC to avail their home loan.
    The interest rate differential appears to be small, but the savings could be substantial over the loan tenure (assumed to be around 20 years). For instance, SBI is currently offering a fixed interest rate of 8% for one year and subject to resetting it after one year. Under its regular schemes, loans below Rs 20 lakh carry an interest rate of 9.25%.
    The corresponding rate offered by ICICI Bank is 9.75%. For a loan of Rs 19 lakh, the savings in equated monthly installments (EMI) is only Rs 620. But if this amount was invested at an annual rate of 10%, the savings at the end of the 20th year would be as much as Rs 4-5 lakh. A similar comparison between the home loan rates offered by HDFC Bank and SBI shows the savings to be in the range of Rs 3-4 lakh. If one compares ICICI Bank and SBI for a loan amount of Rs 35 lakh, the savings at the end of the 20th year could be at least Rs 12 lakh. However, in the said loan range, HDFC Bank is better placed than SBI and one might not save much. One is assuming that the differential in interest rates would continue for the entire loan tenure such that the differential EMI would remain
more or less constant.
    However, the benefit from home loan transfer is not as much. For a home loan transfer of Rs 19 lakh between ICICI Bank and SBI, the savings at the end of 20 years would be around Rs 1.4-2.3 lakh after accounting for pre-payment penalty charges and processing fees. It would be even less in case of HDFC Bank. The exact amount of savings depends on prepayment penalty charges and interest rate differential.
    HDFC Bank levies a prepayment penalty of around 3%, whereas it is 2.25% in case of ICICI Bank. Such high penalty charges render the transfer of smaller loans unattractive. And since loan transfers from one bank to another involve a lot of hassles, it is not attractive to change the home loan lender in case of smaller loans. But if the loan amount is large, say around Rs 35 lakh, there would be substantial savings of around Rs 10-12 lakh in case of a loan transfer from ICICI Bank. However, in case of HDFC Bank, where the pre-payment penalty is high
and interest rates in this slab are lower, there would be no savings. Hence, loan transfer wouldn't make much sense.
    The above analysis is based on the general interest rates offered by banks and does not consider special discounts, rates and terms & conditions. Moreover, the calculation shown is only indicative. Other public sector banks may offer better rates for a particular loan amount. Home buyers should therefore study the benefits they would get, depending on the exact rates and individual circumstances.
    (With inputs from Supriya Verma Mishra)
    santanu.mishra@timesgroup.com