SBI Special Home Loan Boon Or Bane

The launch of low-rate home loan products by India's largest bank State Bank of India (SBI) sent its rivals into a huddle. Peers called the move a 'gimmick', but they could not avoid the war triggered by the bank's so-called 'teaser rates' and instead had to join it. SBI justified its new products SBI Easy Loan and SBI Advantage Home Plan for amounts up to Rs 50 lakh and above Rs 50 lakh as a part of the process to build its credit portfolio. To counter these rates, LIC Housing Finance came out with a floating rate offer of 8.5 per cent while the leading private player HDFC Bank rolled out home loans at 8.75 per cent floating. See Table 1 for rates.

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With most banks' interest rates hovering in double digits, SBI's rates came as a breather to new home loan seekers. But experts think otherwise, they cautioned borrowers that this could be a trap whereby one has to part with more money in the end. Is it true? What should a buyer do to avail better rates? Let us see. In this article, we would assume that rates remain the same throughout the loan tenure as indicated in the table below.

Analysis

In a long-term loan, interest paid through Equated Monthly Instalment (EMI) in the first three years forms the major portion of the total interest paid – 19-23 per cent as per our calculations (Refer Table 2 and 3). This means out of total 20 years, first three years contribute to 23 per cent of the total interest payment. Thus, a detailed analysis of the rates under different conditions can help borrowers save a good chunk in interest payments.

Let us understand this. As per Table 2, LIC HF customers would be paying the lowest interest (Rs. 43,31,103) on a Rs. 40-lakh loan (tenure – 20 years, interest rate – 8.5 per cent) and its interest component remains 22.84 per cent for the first three years, the highest among three. It is a good deal considering the interest paid is less in comparison to SBI and HDFC. On the other hand, SBI borrower would pay a slightly higher interest component despite being offered the lowest rate (8 per cent) in the first year; it is the lowest in terms of percentage basis. Moreover, the processing fees in SBI has been waived till March 31, 2009, hence, the net interest rates would be as shown in Table 2. Further, as per its home loan rate history, SBI has always provided competitive rates compared to its peers. So, its interest component would always remain low. Hence, the benefit of lower interest payments will be available in the first three years even if the interest rate rises, as the rise will be across institutions.

However, for a Rs. 60-lakh loan, the current SBI rate does not seem to be attractive as the total interest payment in this case is higher, for it attracts a higher rate of 10 per cent after three years. SBI's total interest component in the first three years is Rs 15.11 lakh as compared to Rs 14.84 lakh and Rs 16.96 lakh of LIC HF and HDFC. But the total interest paid is Rs 75.95 lakh which is comparatively higher than Rs 64.97 lakh and Rs 75.92 lakh in case of LIC HF and HDFC. Moreover, the processing fees in SBI has been waived till March 31, 2010, hence, the net interest rates would be as shown in Table 2. Here, again LIC HF offers the best deal at the current rate of 8.5 per cent which is the lowest in this category.

Moreover, private lender HDFC Bank has loan rates higher than its PSU peers. So, EMI payments for private players may rise at an alarmed rate if the interest rate in the market hardens, thus, impacting a borrower's cash outflows.

Hence, there are scenarios where individuals can have different options:

• If you are an existing home loan borrower who wants to shift to new rates, you can either negotiate with your existing bank for a levelled interest rate or shift to PSU banks if they offer better rates. In this case, even after paying a prepayment penalty, you can save a good amount in EMI payment.
• New borrowers can always consider new schemes offered by PSU banks as interest payments in the first three years would be comparatively less.

Conclusion

At the outset, SBI's new rates look very attractive because of their initial low EMIs. But one sees a gradual increase in the EMI amount, especially after third year when the rate is linked to the SBAR (benchmark lending rate). A difference in the cash inflows and outflows can throw one's finances into tizzy. But a regular and disciplined borrower – who has done his calculations right at the beginning – can save a large chunk of money in EMI payments. So one can select between LIC HF and SBI, as per his/her risk appetite.

Moreover, in the current market, banks do not always sell loans at the rates quoted earlier. There are hidden premiums charged over the actual interest rates depending upon a borrower's credit history. This is widespread among private players. So, negotiation is the key that has to be used by all existing and new borrowers to get the best deal and save their hard-earned money.