How SBI scores over peers in home loans

Rate cut, increase in limit, withdrawal of processing charges are some of the pluses, writes Tinesh Bhasin.

Last Friday, the country's largest bank, the State Bank of India, created a flutter in the home loan market when it slashed rates by another 0.5 per cent in second and third years under the Easy Home Loan (up to Rs 50 lakh) and Advantage Home Loan (above Rs 50 lakh) schemes.

It also raised the limit from Rs 30 lakh (Rs 3 million) to Rs 50 lakh (Rs 5 million) for the Easy Home Loan segment, the first bank to do so.

No wonder, market experts are quite enthused. "This scheme becomes unbeatable compared to all other as interest rates are fixed for the first three years," said Harsh Roongta, CEO, www.apnapaisa.com.

He said that in a floating rate scheme, banks have the option to revise the rate upwards as and when interest rates go higher. In SBI's case, they will realign with market rates only after three years, giving the scheme an edge. Only Canara Bank has a five-year fixed rate, though pegged higher at 9.25 per cent (between second and fifth year).

In the last few months, many banks have resorted to this part-fixed, part-floating rate structure in which they are offering a fixed rate for a limited tenure. After that, the rate is based on the existing benchmark.

For instance, SBI has set the floating rate at 2.75 per cent below the State Bank Advance Rate or a fixed rate 1.25 per below SBAR. Also, it is not charging any processing fee, no prepayment penalty if the loan is paid from one's own resources and offering a free personal accident insurance.

For potential home buyers, these rates look very attractive. However, while deciding a lender, there are a number of things that one needs to look at.

There are a number of players offering this part-fixed, part-floating rate. Besides, SBI LIC Housing Finance has a Fix-o-floaty and Canara Bank has a five-year fixed rate.

Perhaps the simplest way to compare rates is the average rate per year. However, one has to take existing conditions and benchmark rates into account.

For someone, who is looking for a 20-year, Rs 30-lakh loan, SBI's average rate is 8.76 per cent a year. Only, Axis Bank's floating rate and Indian Overseas Bank offer a competing rate of 8.75 per cent.

HDFC and LIC Housing Finance's special scheme (Fix-o-floaty) are offering annual rates of 9 per cent (EMI = Rs 26,911 a month) and 9.1 per cent (EMI at Rs 27,185).

In case of the administrative and processing fees, SBI schemes score because there are no charges. Lenders such as Axis Bank and HDFC, charge 1 per cent as processing fee. ICICI Bank and Canara Bank charge 0.5 per cent.

As far as prepayment penalty goes, SBI is not charging anything if the loan is paid from one's own pocket. Most banks such as LIC Housing Finance, ICICI Bank and HDFC charge 2 per cent as prepayment penalty.

The only area, where SBI seems to lose out a little is the loan-to-value (LTV) ratio. This ratio refers to the amount borrowers need to contribute to the overall cost of the property.

SBI's LTV ratio is 80 per cent. HDFC, LIC Housing Finance and Axis Bank give up to 85 per cent of the total property value as loan.