The State Bank of India is now offering a new home loan scheme until April 30, 2010 to potential loan seekers: a fixed interest rate of 8.0 per cent for Year 1 and 9.0 per cent for Year 2 and Year 3.
Thereafter, interest rates will be hooked on the then current prime-lending rate (PLR). The new scheme offers a floating rate of SBAR minus 1.75 basis points. There are no loan prepayment charges.
How is this scheme different from the earlier scheme in effect prior to March 31, 2010?
Under the earlier scheme, borrowers were charged fixed interest rate of 8.5 per cent for Year 2 and Year 3 for loan amount less than Rs 50 lakh (Rs 5 million) and a rate of 9 per cent for first three years for loan amount of greater than Rs 50 lakh. Year 4 onward the interest rate was fixed at PLR minus 2.75 basis points.
Case study
Let us compare the loan structure under the old and current home loan scheme offered by SBI:
Principal amount of loan: Rs 100,000
EMI: Rs. 20,000 per month
Assume PLR for Year 4 to10 is 11.75 per cent.
Calculation of Interest and Principal repayment
|
Interest and Principal repayment prior to 1st April, 2010 | |||||||
|
Years |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
|
Principal Due |
1L |
89,000 |
76,565 |
63,073 |
48,750 |
33,137 |
16,119 |
|
ROI |
9.00% |
8.50% |
8.50% |
9.00% |
9.00% |
9.00% |
9.00% |
|
Interest (Rs.) |
9,000 |
7,565 |
6,508 |
5,677 |
4,387 |
2,982 |
1,451 |
|
Principal(Rs.) |
11,000 |
12,435 |
13,492 |
14,323 |
15,613 |
17,018 |
16,119 |
|
EMI |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
16,119 |
|
Interest and Principal repayment after 1st April, 2010 | |||||||
|
Years |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
|
Principal Due |
1L |
88,000 |
75,920 |
62,753 |
49,028 |
33,931 |
17,324 |
|
ROI |
8% |
9% |
9% |
10% |
10% |
10% |
10% |
|
Interest (Rs.) |
8,000 |
7,920 |
6,833 |
6,275 |
4,903 |
3,393 |
1,732 |
|
Principal(Rs.) |
12,000 |
12,080 |
13,167 |
13,725 |
15,097 |
16,607 |
17,324 |
|
EMI |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
19,056 |
Observations:
- Under the current scheme, interest payments are lower for the first year.
- Interest payment for the second and third year remains unchanged for loan amount greater than Rs. 50L.
- The Interest rates have increased by 1 per cent for the 4th year onwards under the current scheme. The increase is insignificant for small term loans.
- There are no prepayment penalties. Therefore, if the loan is repaid in the 3rd year itself or earlier than its term, borrowers will actually stand to gain.
- Under the current scheme, borrowers will have to repay loans at higher interest rates 4th year onwards. So, the interest portion of EMI will be higher. Incase, a borrower cannot prepay the loan, his total amount of interest outlay will be considerable.
Base rate, et al
July 20,2010 onwards, RBI has stated that banks will have to peg their interest rates on their Base rate and not the PLR. Therefore new loan seekers will not know the amount of their interest liability until July end. If the rates were increased, which most likely is the case, it would be a good idea to get your loan now if you want a short-term loan.
This way, you are assured of low rates in initial years at least. In case you need a long-term loan, taking a loan now will give you the benefit of lower rates initially. However, you will have to take the risk of increase in the interest rates after three years.
Assume that the bank's base rate increases to 15 per cent in the fourth year and 16 per cent in 6th year. The impact on short-term loan holders is not very significant as compared to long-term borrowers. Not only is the interest outflow higher but in case of fixed EMI, the tenure for loan repayment will also increase.
Case study:
Let us compare the loan structure under the current home loan scheme offered by SBI if the base rate is 15 per cent after July, 2010:
Principal amount of loan: Rs. 50 lakh
EMI: Rs 83,333 per month
|
Interest and Principal repayment for current scheme - up to 30th April, 2010 considering PLR |
| ||||||||
|
Years |
1 |
2 |
3 |
4^ |
5^ |
6^ |
7^ |
| |
|
Principal Due (Rs.) |
50L |
44L |
37.96 lakh |
31.38 lakh |
24.52 lakh |
16.97 lakh |
8.67 lakh |
| |
|
ROI |
8.00% |
9.00% |
9.00% |
10.00% |
10.00% |
10.00% |
10.00% |
| |
|
Interest (Rs.) |
4 lakh |
3.96 lakh |
3.42 lakh |
3.14 lakh |
2.45 lakh |
1.70 lakh |
0.87 lakh |
| |
|
Principal(Rs.) |
6 lakh |
6.04 lakh |
6.58 lakh |
6.86 lakh |
7.55 lakh |
8.30 lakh |
8.67 lakh |
| |
|
EMI |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
9.54 lakh |
| |
|
Interest and Principal repayment for current scheme - up to 30th April, 2010 considering Base Rate | |||||||||
|
Years |
1 |
2 |
3 |
4* |
5* |
6* |
7* |
8* | |
|
Principal Due (Rs.) |
50 lakh |
44 lakh |
37.96 lakh |
31.38 lakh |
25.54 lakh |
18.92 lakh |
11.43 lakh |
3.06 lakh | |
|
ROI |
8.00% |
9.00% |
9.00% |
13.25% |
13.25% |
13.25% |
14.25% |
14.25% | |
|
Interest (Rs.) |
4 lakh |
3.96 lakh |
3.42 lakh |
4.16 lakh |
3.38 lakh |
2.51 lakh |
1.63 lakh |
0.43 lakh | |
|
Principal(Rs.) |
6 lakh |
6.04 lakh |
6.58 lakh |
5.84 lakh |
6.62 lakh |
7.49 lakh |
8.37 lakh |
3.06 lakh | |
|
EMI |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
10 lakh |
3.49 lakh | |
^Assuming PLR for Year 4 to10 is 11.75 per cent.
* Assuming Base rate increases to 15 per cent p.a. in Year4 and 16 per cent p.a. in Year 6 and the new scheme states the interest rate to be base rate minus 175 basis points.
1 lakh = Rs 100,000
Image: SBI Chairman O P Bhatt. Photograph: Reuters
