The base rate is the minimum rate at which the bank can lend money. The home loan interest rates charged is the base rate plus spread. For instance, if the bank base rate is 10% and the spread are 0.5% then the effective home loan interest amounts to 10%+0.5% = 10.05%. The spread is equal to or more than zero. The spread doesn’t change over the loan tenure.
Do you know what benchmark prime lending rate is?
The prime lending rate is the interest rate that the banks charge the customers who have a good credit rating. It is up to the banks at times to set their own prime lending rate.
Do you know how do the base rate and the prime lending rate make a difference?
When there is a reduction in the RBIpolicy rate the lenders start to reduce their base home loan rates as they are unable to lend below the base rate. Because, when the base rate falls the home loan interestrates also falls. For instance, if thebank base rate is 15% and the spread is 0.5% then your effective interest rate is 15%+0.5% = 15.5%, if the base rate falls to 10% the interest rate will also fall down subsequently.
What is the difference between floating sand fixedinterest rates in home loans?
If yourexisting home loan in the bank is linked to the prime lending home loan rates, in that case you can approach the bank to link your home loan to the bank base rate. One thing that needs to be kept in mind is that there are no extrachargesforswitching to the base rate. The bank has to then adjust the spread on the base rate to maintain the interest rate you were paying when you were linked to the benchmark prime lending rate. When you link to the base rate it will in noway result in the reduction of the home loanbut will surely ensure that you do avail the future benefits of reductions.
The home loans and interest rates
Youcan also switch your floating home loan interest to the rates that are being offered to new customers by paying switch over charges. These switch over charges are categorically around 0.5% to 1% of the outstanding balance. These switch over charges depend upon outstanding, credit history of the loan balance, the differencebetween the rates of interest that is being currentlycharged and the new interest rates that are being charged to the new customers.
If you are paying the switch over charges it is much better and it does surely make a lot of sense especially when the interest rates are greater than0.75% and outstanding period or the loan amount is higher.