EXISTING home loan customers, REJOICE! Here's why

With ICICI Bank -- amongst country's three topmost lenders -- already offering better home loan rates to existing customers post RBI's 0.5 per cent cut in repo rate in April, competitors too are likely to follow suit.

And that -- feels Nikolai Kirtikar, product manager, Apnapaisa.com -- could bring joy to a majority of existing retail home loan customers.

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At last! Some good news for the existing home loan customers came in when the Reserve Bank of India announced a sharp reduction of 50 basis points in the repo rate. This reduction has come after a long wait of almost three years.

This invariably means the borrowing from RBI will become cheaper for commercial banks. The logic is, if commercial banks get cheaper money from the RBI, they pass on the benefit to those who borrow from them.

In fact, the instant reaction of this move saw a downward revision of base rate offered by ICICI Bank, IDBI Bank, Punjab National Bank, Syndicate Bank, Kotak Mahindra Bank, Bank of Baroda, Allahabad Bank, etc.

But what matters most for the common man is: Will these rate cuts translate into reduction of interest rates on consumer loans -- home loans, personal loans etc -- especially home loan EMIs for existing customers?

The enthusiasm about the rate cut seems to be low. Like in the past, all the best rates seems to have been reserved for the new customers only (maybe we can call it a bait to add the numbers).

However, all this might change soon.

With the removal of foreclosure penalty on floating rate of interest and threat of losing their existing base to other competitive lenders who are ready to woo new customers by offering tempting rates, the lenders will have to rework their strategy and try to retain their fast dwindling base of existing customers.

Unfortunately, most lenders still seem to have been focused on generating new home loan customers at the cost of existing customers.

The notable change has been witnessed in the pricing of ICICI Bank though.

Probably the first bank to offer the rate cut benefits to the existing borrowers rather than to their new borrowers ICICI Bank has reduced its base rate and increased the spread for new customers.

This move effectively works to bring down home loan rates for existing customers.

An illustration in the NEXT slide will help you understand the benefits of drop in base rate for existing customers.

For all those borrowers who took a home loan from ICICI Bank last year at an interest rate of 10.5 per cent (Base rate 10 per cent + spread 0.5 per cent) for loan amount below Rs 30 lakh, with the drop in base rate they will now have to pay an interest rate of 10.25 per cent (Base rate 9.75 per cent + spread 0.5 per cent).

Whereas new borrowers will continue get home loans at 10.5 per cent (Base rate 10 per cent + spread 0.75 per cent).

The new customer is paying higher rate of interest because though the base rate has dropped the spread has increased, resulting in higher interest rate compare to existing customer.

Same logic applies to higher ticket size home loans. This benefit will be passed on to the existing borrowers from their next respective payment cycle.

This has certainly given new hopes to all those existing borrowers who have been at the receiving end all through the process. Hope the other lenders too will follow suit if they wish to survive in the competitive home loan market.