What will happen if your loan application is under when the bank slashes its interest rate will you get the rate cut benefit or not read on for answers
Viraj, a software professional working in Bengaluru,was sanctioned a pre-approved home loan of '50 lakh in August. At the time of applying for the loan, he had not identified the property he wished to buy. Eventually, Viraj finalised a property at the right price and was about to approach the bank for disbursement when he came to know that his bank had slashed the interest rates.
While everyone seemed happy about the rate cuts, Viraj was wondering whether he had applied for a loan at the wrong time. Like Viraj, almost every loan applicant who may have applied for a loan before a rate cut may have faced such a dilemma. Here are answers to some of the common questions that borrowers like Viraj would have.
My loan is under process. can i avail rate cut If the bank lowers its rate during the time your loan application is being processed, you will get the full benefit of the rate cut. If your loan has been sanctioned or partly disbursed, then your loan rates will be decided as per the applicable rate for your loan type — i.e., floating or fixed-at the time of disbursement. Banks have their own yardstick to decide whom to offer the benefits of a rate cut.
Floating rate borrowers Partly disbursed loans: If you have taken a loan under a floating rate scheme and your loan has been partly disbursed, you will get the benefit of the new revised rate if the bank changes its base rate with or without changing the spread. However, if the bank changes only its spread, you will not get the benefit of the change, as the change in spread would be applicable only to new applicants.
Sanctioned loans: If the loan is already sanctioned, as in Viraj's case, but not disbursed, the borrower will get the benefit of the new rate. At the time of disbursement, the bank will re-sanction the loan at the current rate, passing on the benefits to the borrower.
Loans at pre-sanction stage: If your loan is in the pre-sanction stage, it will be sanctioned as per the new rates.
Fixed rate borrowers Partly disbursed loans: For loans taken at a fixed rate, the rates will remain fixed as per the terms of the loan scheme once the disbursement is made. In other words, even if the bank changes the rate just a day after your first disbursement, you interest rate will not change. Your loan will be affected by further rate revisions only as per the scheme's applicable terms and conditions.
Sanctioned loans: The decision on passing on the benefits from rate cut to the customer post sanctioning lies with the bank under a fixed rate loan. Some banks may opt to pass on the benefits and re-sanction the loan with the new rate during disbursement. However, others may not change the fixed rate after sanctioning.
Pre-sanction stage: Fixed loan applications in the pre-sanction stage will be sanctioned as per the new rate as applicable.
What are base rate and spreads The home loan interest rate is divided into two components: one is the base rate and the second is the spread. Banks fix their base rate depending on the RBI repo rates. Spread is a percentage margin over the base rate that the bank offers to every customer. When the RBI reduces the base rate, banks can either reduce the base rate, or keep the base rate unchanged and reduce the spread.
When banks reduce the base rate, loans of floating rate borrowers will be considered as per the new base rate. If the bank reduces only the spread, the revised rate will be applicable only for new loan applications and for undisbursed loans (as per the bank’s decision).
What are my options as borrower with partly disbursed loan A borrower with a partly disbursed loan is considered as an existing home loan borrower. If you are not getting the benefits of the rate cut, you have an option to switch your loan to the new rate. For this, you need to pay a switching charge of 0.5 per cent of the disbursement amount to the bank and move to the current rate of interest applicable to new borrowers.
Rate revisions for loan applicants may not be always as per the RBI policy revisions. The effective date of rate change for loans will be applicable from the date of announcement of rate revision by the bank, or the applicable date of new rates as announced by the respective banks.
The writer is the CEO of BankBazaar.com
