This is what any prudent loan applicant will do. If you want to enjoy lower interest rates on your home loan during the course of your home loan tenure, do not change your lender.
Ravi(39) had borrowed a home loan in the year 2005 which was at 5%, now with the inflation, and rising prices, the interest rate currently has gone up to 12.5%. He wanted to do something about it, and thought of confronting the bank about this situation so that he can make some part payment and try and ease his strain on monthly finances.
When he had a chat with his branch manager, the manager agreed his move of the part payment and given him a pleasant surprise – making a one time payment of 0.5% on his outstanding amount will entitle him to an interest rate of 11%. Ravi was extremely delighted because this will enable him to save a huge sum so that the loan can be prepaid. This move was mainly because, Ravi was a prompt customer and paid his instalments on time.
While Ravi was at the bank, he noticed that there were other customers who faced the similar situations. But the difference was that, they wanted to transfer themselves to other banks where they were offering lower interest rates. The banks were using this option of reducing the interest rate if you could make a decent amount of one time payment, so that they can retain their customer base without letting them transfer.
The banks major income comes from the payments made by the customers who borrow loans. With the rising interest there is always a fear that, apart from transferring themselves to other banks, there is an increased risk of defaults. So in order to keep the income of the banks active, reducing the interest rate can provide relief up to some extent- to the banks as well as borrowers. However, this option is kept aside only for those borrowers who fit the criteria of availing this option as specified by the bank.
The criterion could be as follows:
1- borrowers with large ticket sizes generally get in a larger reduction in the interest rates which may range anywhere from 1.25% to 1.75%. The customers with lower loan size may have to be satisfied with a lower reduction, which could be anywhere between 0.75% to 1%.
2- Borrowers who are paying a higher rate of interest are generally offered substantial relief as compared to the rest.
3- The credit history of the customer.
4- Potential of the borrower to generate more business in future, which will entitle him to opt for top up loans or personal loan etc. In such situations, loans will be granted at lower interest rates.
However, it is observed that, a prudent borrower will realize, if any bank offers him lower interest rates, there can be hidden charges, like the processing fee, legal charges etc. So therefore, he will find that it is advisable for him to stick to his existing lender even though he reduces the rates to 11.5/11% so as to not incur any unwanted costs on the eventuality of changing the lender.
But the decision regarding granting the loaners with such a privilege, depends clearly on the banks’ decisions as to who should be entitled to such benefits or not. “A product pricing at any given point of time is decided with factors like the position of asset and liability in the bank at the time and cost of funds. However with time, the product could be cheaper or costlier to the new customers .If we offer such incentives to old customers with the reduction in the interest rates, then even old borrowers who are enjoying higher interest rates on their deposits as compared to new ones would need some tweaking,” an official of SBI said.
Summing up, we can come to the conclusion that, if you have been a loyal customer to the bank for over 10-15 years, maintained a good track record, paid your payments and EMIs on time, then there is a high possibility that bank can consider your request of reduction in loan rates.