[condor]

@Prabhu:

http://www.thehindubusinessline.com/...cle3017293.ece

[longhorn]

Originally Posted by condor

Question:
What is a negative spread ? If the bank is offering a higher negative spread is it good ? Can it be accepted ?

A bank cannot offer a -ve spread simply because as per RBI rules, they cannot lend below their base rate. As far as banks are concerned, it is always base rate+ some percentage (usually between .05-0.5) depending on the bank

This rule however is not applicable for housing finance companies. HDFC is the master of -ve spread. For floating loans, new customers alone get the benefit of lower rates because they are offered loans with a higher -ve spread than an existing customer. When rates go down, instead of reducing the RPLR (the equivalent of base rate for HFC's) they offer a higher -ve spread to new customers.

As far as possible, try getting a housing loan from a nationalised bank. To put things in better perspective, the interest rate on my car loan (SBI) is lower than the interest rate on my home loan (HDFC Ltd). So much for priority sector lending at lower rates. The HFC's are out there to suck your blood. Avoid them like the plague.

[condor]

Thanks, @Longhorn. What if the loan is already with HDFC ?

[longhorn]

Originally Posted by condor

Thanks, @Longhorn. What if the loan is already with HDFC ?

Depends on what stage your loan is now. If the principal portion of your EMI is > 50 % of the EMI amount better stick with HDFC itself.

If your interest component is higher than the principal then

1. You can try to prepay some amount and thereby reduce the total interest outgo on the loan.
2. You can go for loan takeover by SBI(preferred).

[condor]

Loan take over would mean pre-payment. Pre-payment is suitable only if this is being done with own funds, and not as a loan transfer.

[rajivr1612]

Originally Posted by longhorn

Depends on what stage your loan is now. If the principal portion of your EMI is > 50 % of the EMI amount better stick with HDFC itself.

If your interest component is higher than the principal then

1. You can try to prepay some amount and thereby reduce the total interest outgo on the loan.
2. You can go for loan takeover by SBI(preferred).

Hi longhorn,
I have a home loan with HDFC which I am planning to foreclose. I will be taking a gold loan and plan to use it to close out the home loan. Does HDFC ask the source of the funds?

[condor]

Guys, still looking for an answer regarding the negative spread. Or "Spread of minus x% over RPLR"

Though, one post here:
http://www.apnapaisa.co.in/questions...e-rplr-spread/

[benbsb29]

Originally Posted by rajivr1612

Hi longhorn,
I have a home loan with HDFC which I am planning to foreclose. I will be taking a gold loan and plan to use it to close out the home loan. Does HDFC ask the source of the funds?

I believe HDFC does ask for a bank statement for the last 6 months as a minimum to determine the source of funds.

My current grouse with HDFC is that for prepayments they insist on a cheque to be submitted, and will not accept an online transfer. With me currently not residing in India, this means i cannot make any prepayments even if i want to! They come up with such silly policies, just to make life all the more difficult.

[gsurya]

Originally Posted by rajivr1612

I have a home loan with HDFC which I am planning to foreclose. I will be taking a gold loan and plan to use it to close out the home loan. Does HDFC ask the source of the funds?

AFAIK, gold loans are more expensive than housing loans, the latter also has tax benefits if its for your only home.

If you have excess gold you dont want to keep, better to sell it to pay off housing loan & then invest in gold again when you have funds.

[wanderer4x4]

Originally Posted by condor

Question:
What is a negative spread ? If the bank is offering a higher negative spread is it good ? Can it be accepted ?

Originally Posted by condor

Guys, still looking for an answer regarding the negative spread. Or "Spread of minus x% over RPLR"

As of now, a bank cannot offer a negative spread. The spread is the margin that the banks maintain against the Base rate while giving a loan. Now, for a bank the rate on a home loan can not be less than the Base rate. So, the spread that you'd get while talking a loan from a bank would be at least Base rate+0%. ( Which could be the best scenario)
Now, let us come to RPLR and negative spread. RPLR is a term used by the NBFCs to denote their reference rate which to be honest is a farce. Since, NBFCs are not governed by RBI, they are free to set and maintain their own RPLR. So, what a NBFC does is jack up the RPLR each time the general interest rates in the market go up and to remain competitive offer a higher spread to new customers. This results in existing customers bearing the brunt of the rate hike. Let us take an example..

Let us say the current interest rate for new home loans is 10%.
Say for a bank the current base rate is 9.50% and a NBFC is maintaining a RPLR 14%.
Now, to offer the home loan at 10%, the banks reference is BASE+0.5% and for NBFC, it's RPLR-4%.
But, both the customers have got the same rate of 10% basis which the EMI will be paid, so why should we bother, correct? Let us fast forward to few more months.
Due to various factors interest rate in the markets go up by 0.5%. So what will be the result? Banks BASE rate goes up by 0.5%, RPLR also goes up by 0.5%, so based on spread formula customers interest rate also goes up to 10.5%. All good till now.

Now fast forward 6 more months. Due to good sentiments in the market, the interest rate goes down by 0.5%. Sooner or later the bank reduces the Base rate by 0.5%. ( Though banks do not always pass on the rate reduction, they can not hold the Base rate too different from the prevailing interest rates as all products and pricing of a bank is linked to the base rate.)
Since the bank has reduced the Base rate by 0.5%, the loan interest in the above example comes down back to 10% now. But, the NBFC decides not to change the RPLR, which was 14.5% after the initial hike in the above example. So, the NBFC interest rate remained 10.5% even after the reduction in rate. So, why would a new customer in this scenario go for the NBFC and pay 0.5% more? Well, for the new customers, they will cheekily increase the spread by 0.5% to make it RPLR-4.5% to remain on a level playing field with competition. But, in this trickery, the existing customers get a hit as they are on a reference of RPLR-4%.

So, you can see that a company offering big negative spread means it has increased the RPLR at the time of rate increase, but have not reduced the RPLR too much when the market rates reduced. So, I'd be wary of the NBFCs offering too much negative spread.

Hope, I've been able to throw some light on it and haven't confused you more.

[vrprabhu]

Originally Posted by longhorn

A bank cannot offer a -ve spread simply because as per RBI rules, they cannot lend below their base rate.

This rule however is not applicable for housing finance companies.

When rates go down, instead of reducing the RPLR (the equivalent of base rate for HFC's) they offer a higher -ve spread to new customers.

To slightly confuse things , Base Rate is not the EQUIVALENT to Prime Lending Rate (PLR).

RBI has prescribed the factors to be considered while quoting Base Rate and hence Base Rate is almost always LESS than PLR.

(BTW, PLR is derived from what rate the lender wants to lend a first class customer i.e. least risk of non-repayment by the client.)

Each HFC defines its own PLR; sometimes it is a gimmick to convince the customer (especially a new one) that he is being given a discount (i.e. negative spread) while sanctioning the loan.

For example, if RPLR is 11.50%, you are offered a negative spread of 0.50%, which means an effective rate of 11%.

On the other hand, if the rate quoted by a Bank is Base Rate (say, 10.25%) PLUS a spread of 0.25%, the effective rate is 10.50%.

Usually, there is a reset clause after the initial two / five years by the HFCs, and after this period, the rates goes up!

Originally Posted by condor

Guys, still looking for an answer regarding the negative spread. Or "Spread of minus x% over RPLR"

Condor, hope this helps.

What can generally be done is to negotiate with your existing lender to see if you can avail better terms (by switching over to other products with the same HFC). You may need to pay an admin fee, say 0.50% of the outstanding loan amount.

Otherwise, you have to do the math; i.e., whether what you pay a pre-payment penalty to the HFC ( and the admin, processing and documentation charges to be paid to the new lender ) will be lesser than what you will gain in terms of the reduced interest rates over the life of the loan.

One thing to bear in mind, it is better to stick with some top PSBs and Pvt Sector Banks for housing loans as their base rates are best in the industry and the actual interest on the housing loan will be lesser than what is charged by HFCs.

[longhorn]

Originally Posted by condor

Loan take over would mean pre-payment. Pre-payment is suitable only if this is being done with own funds, and not as a loan transfer.

To the best of my knowledge it is applicable only for fixed rate home loans and not for floating rate. In fact, they cannot even charge you anything for partial/ full prepayment. HDFC has no business to ask whether you have begged, borrowed or stolen the money.

Originally Posted by rajivr1612

Hi longhorn,
I have a home loan with HDFC which I am planning to foreclose. I will be taking a gold loan and plan to use it to close out the home loan. Does HDFC ask the source of the funds?

Replied above

Originally Posted by benbsb29

My current grouse with HDFC is that for prepayments they insist on a cheque to be submitted, and will not accept an online transfer. With me currently not residing in India, this means i cannot make any prepayments even if i want to! They come up with such silly policies, just to make life all the more difficult.

Transfer the funds to your parents/ siblings and ask them to walk into any HDFC Ltd near to them with their cheque book. You might have to come in person to get your documents back, but I don't see any reason why you cannot prepay a significant portion of your loan and leave only a token amount on the loan which you can close when you are back.

[condor]

wanderer4x4 : Now, let us come to RPLR and negative spread. RPLR is a term used by the NBFCs to denote their reference rate which to be honest is a farce.

Thanks !
This reminds me of the term "policy" that is so often thrown around to justify something that cant be justified !

Your post has got me thinking. I will check on other banks to transfer my loan.

[rajivr1612]

Originally Posted by longhorn

To the best of my knowledge it is applicable only for fixed rate home loans and not for floating rate. In fact, they cannot even charge you anything for partial/ full prepayment. HDFC has no business to ask whether you have begged, borrowed or stolen the money.

Replied above

Phew!! Good to know that. Thanks for the info.

Rajiv.

[benbsb29]

Originally Posted by longhorn

Transfer the funds to your parents/ siblings and ask them to walk into any HDFC Ltd near to them with their cheque book. You might have to come in person to get your documents back, but I don't see any reason why you cannot prepay a significant portion of your loan and leave only a token amount on the loan which you can close when you are back.

Thanks for your reply.

I had already checked with them previously on this. As this is a joint loan, the cheque has to be in the name of either one of the borrowers. However, this can be presented by any other family member. Somehow, i am not too comfortable with sending across a signed cheque via the mail.

The next requirement which came up the last time we made a small prepayment was the demand for 6 months of bank statement to determine source of funds.