Home loan rates of different banks

In order to lend you money, banks and housing finance companies borrow from depositors like you and from corporate and government institutional lenders. Obviously, they need to charge you a rate higher than what they pay out. The difference between the cost of their borrowing (also referred to as their cost of funds) and the cost of your borrowing, or home loan rate, is their 'spread'. The higher the spread, the greater their profits.

Floating rate loans. In the case of floating rate home loans, the bank or HFC determines the rate you pay with reference to some benchmark, referred to by different banks as 'prime lending rate' (PLR), 'advance rate', or 'mortgage rate' (see: Owning the Keys to the Treasury).


Owning the Keys to the Treasury

Banks


Benchmark


Fixed by


Current
benchmark
rate (%)


Current
floating
rate (%)1

Citibank


Citibank Mortgage Prime Rate


Bank


11.5


9.5

HDFC


Retail PLR


Bank


12.25


RPLR minus 2.75

ICICI Bank


Floating Reference Rate


Bank


10.25


9.5

SBI


State Bank Advance Rate


Bank


11


SBAR minus 1.25-2.25

Bank of Baroda


BoB Prime Lending Rate


Bank


11.5


BPLR minus 1.25-2.25

HSBC


Prime Lending Rate


Bank


11.5


9.5

ABN Amro Bank


Mortgage Floating Reference Rate


Bank


11.5


9.5

Kotak Bank


Prime Lending Rate


Bank


12.25


9.25

ING Vysya Bank


Home PLR


Bank


13.5


9.5

1As applicable to new borrowers

PLR: Prime Lending Rate

In all the above cases, the floating rate is revised every three months from the date of first disbursement and it matches the revision in benchmark rate; the benchmark rate is reviewed every quarter (exact date not specified by a majority of banks) and it is at the discretion of banks to revise it or not

Your floating loan carries a rate that is usually upto 3 per cent lower than this benchmark. But that does not mean you are being obliged - this benchmark rate is not the cost of funds for the bank or HFC. It is an internal measure related to the cost of funds.

Nor is there any legal sanctity to the difference between the benchmark and the floating rate. For instance, on 1 July 2006, Standard Chartered Bank had a current home loan reference rate of 12.50 per cent and stated that the floating loan interest will be upto 5 per cent below this. On 31 August, this was 9.85 per cent.

If the cost of funds goes up, banks and HFCs tend to maintain their spread by increasing their benchmark rates and hence your floating loan rates. But the two do not necessarily rise at the same pace or time.

Says Sujon Sinha, head, retail assets, UTI Bank, "When interest rates are falling, a bank lowers the prime lending rate only after the cost of funds falls by 0.50 to 0.75 per cent. But if the rates are climbing up, a bank is prompted to raise the rate for every 0.25 per cent rise in the cost of funds."

Obviously, you do not benefit by this arrangement. Says Harsh Roongta, CEO, apnaloan.com: "Lending rate affects only loans. A far more objective benchmark reference rate would be one that affects a much larger body of parties - for instance, fixed deposit rates, since they also represent the cost of funds for a bank or HFC."

Banks and HFCs even differentiate between existing floating rate customers and new ones. For example, as ICICI Bank reduced its internal retail PLR from 11.50 per cent in 2002 to 9.75 per cent in early 2004, its existing floating rate borrowers saw their loan rates drop by two per cent, but new borrowers received a further one per cent benefit.

Says Sreenivasalu Raju, loan manager at Andhra Bank: "The problem of non-transparent rates is felt by a customer only when the rates fall. A customer does not have an accurate idea of the fall in rates."

The case of Kamal Baldi, 43, illustrates what can happen when a bank follows an internal benchmark. When he signed up for a Citibank home loan in April 2005, it was at 7.25 per cent.

The bank uses an internal benchmark rate, mortgage PLR, and when it revised it upwards, his interest rate moved up to 7.75 per cent without any intimation. In April this year, his loan rate was further revised to 8.25 per cent, though he was informed this time around.