With fixed term mortgage rates being at an all-time low, many homeowners want to refinance their mortgages. It is when they do this that the fine print on the Standard Charge Terms, given to them at the time of signing the original mortgage, makes itself loud and clear. According to the terms, the lender will charge either three months interest or the IRD (Interest Differential Rate), whichever is higher. With rates on the decline, it is invariably the IRD, which is charged. The actual amount of the IRD charged is naturally finalized only when the lender receives a request for refinance of the mortgage and is defined by the existing rates, prevalent at that time.

The Base Rate System

The base rate system was introduced by the Reserve Bank of India on 01 July 2010. With the Reserve Bank of India de-regularizing the interest rates, the banks are at a liberty to determine their lending rates on loans and usually take their base rate as a reference point. The base rate can be defined as a minimum interest rate that is charged by a bank, below which it cannot grant a loan. It is taken as a kind of a benchmark and differs from bank to bank. Therefore, since home loans are linked to the base rate, the rate of interest also varies from bank to bank.

State Bank of India, for example, is the largest lender and has the lowest home loan interest rate at 9.95% for loans below 30 lakhs and 10.10% for those above 30 lakhs. Inevitably, it enjoys the largest share in the home loan market. The bank charges a conversion fee equivalent to 1% of the unpaid loan amount, if the borrower wants to change rates.

Bank of Baroda- Second Largest Home Loan Lender

Bank of Baroda is the country’s second largest lender. The bank recently opted out of the differential rate system and now charges a flat 10.25% base rate for all home loans, no matter how much the amount or tenure of the loan. It is the first bank to do so.

Mr Ranjan Dhawan, Executive Director of Bank of Baroda, says that since the interest rates on high value deposits have reduced, it has enabled the bank to lower the rates on home loans, thereby projecting a growth of 18 to 19 per cent this year, which is slightly above average in this segment.

The bank, unlike State Bank of India, does not charge anything to its existing home loan customers for the change in interest rates. This has resulted in the bank achieving a 13.5 per cent growth rate per year, with a home loan portfolio of Rs 16,045 crore.

Thus, with the government reducing its rigid control over banks, they have the flexibility to make attractive offers to customers. This has resulted in a win win situation for both customers, who have the option of altering the terms of their repayment as well as for the banks, which have in turn seen a surge in their home loan portfolios.