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Why your EMI doesn't always drop when rates fall

Once you have availed a home loan, you are at the mercy of your financier till the loan is fully repaid

Banks have started cutting base rates and benchmark prime lending rates at the first move by the Reserve Bank of India to cut policy rates. But if you think this will bring down your EMI outgo on a car loan and home loan, think again!

By definition, loans that have a floating interest rates should see EMIs go up when interest rates rise and the monthly installments drop when interest rates fall. While the first process is invariably true, the second is not the case.

Over the years, floating home loan customers have realised that even when interest rates fall they continue to keep paying a higher rate of interest than what banks and financial institution offer to new customers.

What it means is that once you have availed a home loan, you are at the mercy of your financier till the loan is fully repaid. Customers who wish to shift to a cheaper loan through refinancing are required to pay a hefty pre-payment penalty, ranging from 2 per cent to 4 per cent apart from the processing and other charges one needs to pay for the new loan request.

Home financiers blame the variations in floating interest rates on what they call the loan ‘spread’, which is the difference between the benchmark rate and the offered rate of interest. This spread varies from time to time and accordingly the floating rate too will be different for customers having availed loans at different points of time.

For instance at a leading private sector bank, the spread stands at 5.5 per cent at present. It was 5 per cent till sometime back and had even gone down to 4 per cent at some point of time. The ‘spread’ varies according to the cost of fund at the time of offering a loan.

Banks claim they are upfront with customers about the ‘spread’. Even the loan sanction letter clearly mentions the spread, and this too is subject to the spread on offer at the time of disbursement. Banks and home finance institutions offer customers to shift from floating to fixed rate or vice versa during the term of the loan. But they don’t allow customers any shift on spread.

Via : Moneyguru


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