HDFC Merger: Will Your Home Loan Interest Change?

HDFC Bank LogoHDFC Ltd. merged with HDFC Bank effective July 1, 2023, and thus HDFC Ltd. ceased to exist from July 1. Does that affect the home loan borrowers from HDFC?

What Happens to the Existing Home Loan Borrowers with HDFC?

HDFC Bank has released FAQs for the existing HDFC home loan borrowers and loan applicants. You can find the complete list of FAQs on HDFC bank website.

Nothing changes for the existing borrowers and loan applicants. Only the loan will be transferred to HDFC Bank.  The loan account number and the contractual terms remain unchanged. Access to the portal shall also continue with current credentials. Along expected lines.

What about the rate of interest? HDFC used to benchmark loans against Retail Prime Lending Rate (RPLR) while HDFC Bank must use an external benchmark. Clearly, the loan interest rate benchmark must change. Does that change the home loan interest?

Will the Home Loan Interest Change?

The answer is No. Your home loan interest will NOT change.

With HDFC, your home loan was linked to RPLR (Retail Prime Lending Rate).  RPLR + Spread.

As your loan gets transferred to HDFC bank, your home loan interest will be linked to External Benchmark Lending rate (which is RBI repo rate for HDFC Bank). Hence, your loan interest rate will be EBLR + Spread. Can’t do much about RBI Repo rate but the spread will be adjusted such that your home loan interest does not change.

Let’s say your current rate of interest with HDFC is 9% p.a.

EBLR + Spread = 9%

Currently, the RBI repo rate and the HDFC Bank EBLR is 6.5%. Hence, the spread for your loan with HDFC Bank will be 2.5%.

Subsequently, your home loan interest rate will change as the Reserve Bank revises Repo rate.

Alternatively, if your current interest rate with HDFC is 8.5%, the spread will be 2% (8.5% – 6.5%). As you can see, the loan spread adjusts to keep the interest rate unchanged.

Your home loan interest is now way more transparent than it was with HDFC.

RPLR was an internal benchmark and internal benchmarks are never that transparent. A common issue with such benchmarks is that the lenders revise internal benchmarks quickly when the interest rates go up, but are not keen to adjust these downwards when the rates go down. Hence, the borrowers do not get the full benefit of rate cuts and would feel short-changed.

This was the reason the home loan benchmarks have evolved from Prime Lending Rate (PLR) → Base Rate → Marginal Cost of Funds Based Lending Rate → External benchmarks. Common external benchmarks are RBI Repo rate and Treasury bill yields.

Starting late 2019, all new floating rate home loans by banks must be linked to an external benchmark. However, housing finance companies such as HDFC could still use an internal benchmark. Now that all the HDFC home loans are moving to HDFC Bank (which can only offer external benchmark linked loans), your HDFC home loan must also be linked to an external benchmark. Hence this change in benchmark.

With an external benchmark, the home loan interest rate will move in tandem with the RBI Repo rate. No confusion.

Will the EMI Change?

The loan amount does not change. The loan tenure does not change. The interest rate does not change. Hence, the EMI will also stay the same.

Note: I have focused only on the interest rate and the EMI part. The FAQ page seeks to answer many of the operational queries that HDFC borrowers or loan applicants may have. The FAQs have been divided into 3 parts. For existing borrowers with full/partial disbursements. For customers with sanctioned but undisbursed loans. For applicants and pre-sanction cases. You can check the relevant section for your queries.

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