Which Is the Best External Benchmark Loan?

All the banks linked the new retail floating rate loans to an external benchmark from October 1, 2019. In my opinion, that makes the comparison between various home loan products easier. Most of the banks have chosen Repo rate for the external benchmark for home loans. Earlier, benchmark MCLR (Marginal cost of funds-based lending rate) of two banks could move by different amounts. Now, Repo rate will move in the same direction and same amount for everyone. Therefore, the external benchmark does away with this aspect of decision making.

Now, you don’t have to worry “My MCLR has gone down by only 25 bps while XYX bank has reduced by 55 bps.” One less decision to make. Still, when you are planning to take a home loan, you would want to get the best deal. Let’s look at some of the parameters you can focus on.

How Do You Find the Best External Benchmark Linked Home Loan?

#1 Interest Rates

Clearly, the most important parameter is the interest rate. On a long term and big quantum loan such as a home loan, the interest rate is the most important determinant. Given a choice, you would want to sign for the lowest rate of interest. There is some work to do on this front. Despite using the same external benchmark, the interest rates can be very different.

For this, you may want to look around on various bank websites and check the latest home loan rates on offer. Let’s compare the interest rates ICICI Bank and State Bank home loans.

SBI Interest Rates
SBI Interest Rates
ICICI interest rates
ICICI Interest Rates

You can go to the respective websites for the latest home loan interest rates from SBI and ICICI.

You can see the best rates vary across banks. SBI offers a Rs 50 lac loan to a salaried borrower at 8.45% p.a. ICICI offers at 9.05% p.a. I have considered the rates for the best borrowers. There is considerable difference in the rates. Do not just focus on the best rates. You need to compare the rates that you would get at the two banks.

Since credit spread adds to your loan interest rate, this is important too. However, this is not really an actionable information. You will get to know the final spread that is charged to you once you make the loan application. Therefore, this information is post-facto. A few banks link credit spread to credit score (from CIBIL or any other credit bureau). Moreover, the rate that any bank offers to you will depend on the quantum of loan, LTV, your credit profile and your employment status. You can get some idea by looking at interest rate tables.

There is one interesting difference. SBI home loan interest rate is expressed as Repo Rate + Benchmark Spread (2.65%) + Credit Spread (depends on credit profile). ICICI Bank Home Loan is expressed Repo Rate + Spread (includes both credit spread and benchmark spread). Even though I have read adverse opinion about loans where there is just 1 spread (like ICICI bank home loan), I am yet to appreciate the noise surrounding this. I don’t see much difference in the two interest rate structures.

Do note a bank can still have two or more home loan products and they may be offered at different interest rates. For instance, in case of SBI home loans, Maxgain interest rate is higher than regular home loan. As a borrower, you need to see if the excess cost is worth it.

#2 Look out for the Processing Fees

A home loan is a long-term loan. Therefore, the impact of the processing fee on the overall loan cost is not very high. Still, since many home loan borrowers tend to expedite home loan repayments, the impact on the overall cost can still be substantial. Keep this aspect in mind. There may be certain other ancillary charges too. Take note of those charges too, even though they are not likely to make a meaningful difference.

#3 Avoid Third Party Product Purchases

Again, this is something you find out after you have applied for the loan. Some banks push third party insurance products on the applicants. Though RBI has directed against bundling of such products, the bank officials may give the impression that you would not get the loan unless you sign up for such products. These expensive insurance purchases can increase the effective loan amount since the banks offer you loan to purchase such products. Well, a loan is readily available if the bank gets huge commission on such sale. If you have received feedback that a particular bank pushes such products aggressively, then either avoid the bank or stand firm. Remember, the bank knows that RBI does not permit such forced sales. If you stand your ground, they will finally relent.

These were the aspects I could think of. In my opinion, you will have some bias in favour of your current bank. Moreover, the loan tenure can also be important. Higher the loan tenure, the lower will be your EMI, everything else being same. Therefore, from affordability perspective, you may want to go with the bank that is willing to offer you a longer tenure.

If you feel there are additional parameters to be considered, do let us know in the comments section.

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