It is commonly believed that if Banks are offering you the home loan at 12% means it is the total interest they will collect and calculate on your loan. But it is not like that. Your interest on loan consists of two parts. One is Base Rate and another part is Spread. So let us look at each part and how each can affect your EMI.
1) Base Rate:-It is the new system of setting bank’s basic interest rate which was started from 1st July 2010. It replaced the old method of charging Benchmark Prime Lending Rate (BPLR). In simple words you may say that it is the minimum rate, below which Banks cant give you loan (exceptions are Agricultural Loan and Export Credit). It is reviewed on quarterly base. But it is not mandatory that all banks must have same base rate. Advantage of Base Rate over BPLR is transparency. It is calculated considering the below factors. But highest weightage is given to Cost of Deposits.
A) Cost of Deposits, B) Negative carry on CRR and SLR, C) Unallocatable overhead costs, D) Average Return on Networth.
It is the benchmark for all floating rate loans except loans which have tenure of one year. RBI not made it mandatory to follow Base Rate for loans of below one year. But for this sub Base Rate loans too RBI put some strict ceilings.
2) Spread-This is your final rate of interest after adding some % to Base Rate. It is calculated based on the tenure risk, credit loss, profit requirement of bank, operating cost of the bank and risk assigned with individual customer. So each bank’s Base rate may be fixed for all customers. But remember that you may end up with either paying high interest rate or low based on the spread bank charges to each individual. Their is no cap on how much should be spread on and above Base Rate. But charged spread need to be justifiable. Hence your banks may use this tool to charge you more by modifying spread as no regulation on this. Eventhough RBI says spread must be constant over the period of loan but remember to check it whenever the raise in your loan EMI. You need to verify whether the raise in EMI is due to hike in Base Rate or Spread.
Hence while looking for loans always better to check two things from your bank, what is their base rate and spread rate. Also the guidelines Banks follow to calculate the spread and how often the possibility of change in spread. I am clarifying that even though base rate and spread are the part of other type of loans too, I wrote this post concentrating on home loan and car loan.
Venkatesan Rajan
Hello Mr. Basavaraj,
I am having home loan in HDFC for 60 months period.
The balance terms – 54
1. I would like to switch to current ROI with the applicable bank processing fees
2. Also in the same time I have planned to do some partial pre-payment on my principal to the bank
Could you suggest me which above process I should do in first place in order for money saving and more benefits on my loan tenure.
Thank You,
Venkat
Basavaraj Tonagatti
Venkatesan-First one immediately along with pre-payment.
Loansa Assis
I read your article for home loan in lowest interest and how to procedure, but i had about for home, construction, property, housing, montgage all kinds of loans provider more information Get Easy Bank Loan
Basavaraj Tonagatti
Loansa-What is your exact requirement?
Basu Kapashi
Hi,
Can you please let me know what is mean of negative Spread rate.
Ex:
Current Spread = -6.65
Current Rate Of Interest = 9.65
Spread says negative.. Its little confusing. Can you please clarify.
Basavaraj Tonagatti
Basu-May I know where you heard this?
Basu Kapashi
It is there in my Home loan page. Also in another comment here from Satish I see same statement from HDFC.
Satish says
July 30, 2016 at 11:33 PM
Hi Mr.Basavraj,
Appreciate your feedback/views on below:
– Home loan with HDFC (HFC) currently has EMI of 64,635 with ROI 10.45 with a spread of -5.85%
– HDFC offers to reduce the EMI to 61,922 (which is very helpful) with ROI 9.40 but spread of -6.90 with a one time fee of 5,750 (which is not much) and can be done online so convenient
– Alternatively, I have option to switch to ICICI (Bank), with ROI 9.45%
To me the HDFC offer looks the way to go forward, however I am not clear on the spread part. I intend to settle the loan fully in next few years through few partial payments & lower EMI is desirable.
Kindly advise best way forward.
Regards, Satish
Basavaraj Tonagatti
Basu-The spread mentioned here is not negative values.
Manish Verma
Hello Mr. Basavaraj,
I have an ongoing home loan from HDFC bank.
Loan duration is 120 months. ( Total loan amount 3970000 , EMI : 39700 )
Balance terms : 91
Current ROI : 9.8%
Current Spread : 6.5%
Bank is offering me to change the ROI to 9.45% and Spread 6.85% after charging me a fees of INR 5750/- .
Effectively the balance term after that is coming as 90 only.
I have few questions here :
1. Shall I go for lower ROI & Higher Spread ?
2. I have some amount saved in Mutual funds. 2 lakhs or so. Shall I dissolve that and give as pre-payment to bank ?
3. Shall I increase my monthly installment to 45000/- and reduce the overall balance tenure ?
Please suggest.
Basavaraj Tonagatti
Manish-1) Whether it is floating or fixed?
2) Better to reduce your loan outstanding at the earliest.
3) Yes, if it is affordable to you.
Manish
It’s floating at 9.8 as of now. Bank is offering to reduce it to 9.45 but increased spread. Not sure if it has any impact.
My Mutual funds are only worth 2 lakhs. And return in them has been roughly 35% in last 2 years. SIP is active for 10K pm. Is it recommended to liquidate MF and pay to bank? I don’t have any other saving.
Basavaraj Tonagatti
Manish-In that case it is wise to move to bank offer. Regarding mutual funds, you have to take a call but not me. Personally I am of the opinion that to off load loan burden at the earliest.
Sekhar
Sir , we have OD limits of 22.50 million with ICICI bank since 2014. They have been charing the same Base rate as well the spread rate all thruough the years. How to find out the the periodical change of Base rate and spread rate of the bank ?? The latest change of MCLR system can be shifted too ??Kindly advise !
Basavaraj Tonagatti
Sekhar-Regarding charges, you must discuss with Bank. I can’t say how to identify it.
Satish
Hi Mr.Basavraj,
Appreciate your feedback/views on below:
– Home loan with HDFC (HFC) currently has EMI of 64,635 with ROI 10.45 with a spread of -5.85%
– HDFC offers to reduce the EMI to 61,922 (which is very helpful) with ROI 9.40 but spread of -6.90 with a one time fee of 5,750 (which is not much) and can be done online so convenient
– Alternatively, I have option to switch to ICICI (Bank), with ROI 9.45%
To me the HDFC offer looks the way to go forward, however I am not clear on the spread part. I intend to settle the loan fully in next few years through few partial payments & lower EMI is desirable.
Kindly advise best way forward.
Regards, Satish
Basavaraj Tonagatti
Satish-You can move.
Prashant Kyalakond
Hi..
I have loan in HDFC from last four years and i used to check on line my account now i come to know that by the option of Conversion Enquiry My current ROI in % P. a. is 10.55 & Current spread % is -5.75 and also the EMI 6092/- to reduced 5715/- & numbers of EMI were same (For this i need spend Conv. fees 1566/-). So, Please suggest me to what to do
Basavaraj Tonagatti
Prashant-This is how they play the game. New low rates only to NEW customers 🙂 I think it is better to switch. Because within a year you can easily compensate the fee they are charging.
dadhaniya nirav
hello sir
i have required loan so i am contact the idbi bank he was asking the privet secter bank(eg.hdfc,icici)this banks after loan he was spread rate to incrige then rate of interest is incrige so goverment bank is spread rate is stabal?
which bank is best for home loan becuse nationalised bank of not possibal then other bank given the loan ?
please reolay to me
Vijaya Krishna Sola
Hello Mr. Basavaraj,
I took housing loan from LIC with a floating rate of 10.4% in year 2012. But, now the interest rate is at 12%. I am planning to move to different bank. I have got 2 proposals.
1. from LIC itself, like with 1% processing fee, they can move my loan to 10.9% float
2. New bank with 0.5 % processing fee & offering interest rate at 10.25%
Is it a good idea to switch?
Please reply.
Thanks
Vijaya Krishna
Basavaraj Tonagatti
Vijaya-Better to switch with LIC.
Jerry
Hello Mr.Basavaraj,
Im planning to apply a car loan via UCO Bank at a 10.45% Floating Rate, where their base rate is as on the site 0.25%
New Car :- Base rate + 0.25%
https://www.ucobank.com/interest-rates/base-rate-bplr.htm
Can i go in for this or can u suggest me something else?
Basavaraj Tonagatti
Jerry-Whether this car is NEED or WANT?