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Lenders push for home loan prepayment

TIMES NEWS NETWORK[ TUESDAY, JUNE 05, 2007 02:10:04 AM]

Following the hike in home loan rates, banks are encouraging some borrowers to prepay a part of their loans or increase their monthly installments in order to help them meet their liabilities by the time they retire. Sources said that some banks like ICICI Bank and HDFC have made this proposal to middle-aged borrowers whose repayment term now extends beyond their retirement age following the increase in rates. Traditionally, borrowers who have chosen floating rate loans end up paying the same monthly installment as the practice is to vary the tenure of the loan.

Since January 2007, ICICI Bank has raised floating home loan rates by 250 basis points and HDFC have increased it by 175 bps. As a result, the tenor of the loan has increased substantially. Currently, ICICI Bank charges 12% and HDFC charges 11.75% for floating loans. While most borrowers take loan for 15 years or 20 years, a further increase in the tenor of the loan will mean that the some borrowers (in their late thirties) would have to pay monthly installments for few years beyond the retirement age. During the initial hike in rates, banks had raised the tenor of the loan. However, in the subsequent hikes, ICICI Bank has sent a communique to borrower to repay a part of loan or increase the monthly payment. “The move will enable borrowers to reschedule the loan in manner that he does not have any liabilities post-retirement,” said a banker.

Meanwhile, State Bank of India, the country’s largest is yet to frame a policy for borrowers whose loans would exceed their retirement age. “SBI is in the process of framing a policy on this, but the interest rate cycle may change at least a couple of times in the next 10 years,” said a senior SBI official. Most government owned banks have not framed a policy on such loans. “More than 50% of individual borrower repay their loans much before they retire. Even those borrowers nearing their retirement age may consider repaying the loans,” said a senior officials from PSU bank. Also, PSU banks have not raised their lending rates as steeply as some of the private banks. For instance, Dena Bank, Allahabad Bank and Union Bank have not raised their floating home loan rates in the last two occasions even as they have raised the prime lending rates.