Reader comment about ICICI Home Loan

by Manshu on June 16, 2011

in Articles

Piyush Modi had a very interesting comment on yesterday’s post, and this is relevant for people with home loans from ICICI Bank. It seems that he called them up to get something done, and they offered him a lower rate on an existing home loan, and saved him a lot of money!

I’ve been thinking about it, and can’t understand why they did that, and I certainly don’t know of any other such cases.

I thought I’d publish his comment here to see if anyone else has a similar experience, and to let others know about this as well. It will only cost you a phone call, so there is no harm in trying your luck.

Here is his comment verbatim:

Though this comment is not particularly relevant to this post, but I wanted to leave it and want you to write about it cause I am sure it will help many many of your readers.

My dad has a home loan with ICICI Bank which was once taken at a floating rate of 7.5%, and which now stands at 14.5% rate. I recently called up ICICI Phone banking to ask the procedures for a balance transfer to a different bank & I was told that they are running a scheme where existing customers could move to a lower rate of interest. I was skeptical at first, but then went through with the documentation required and apparently its an amazing scheme. Obviously ICICI wont advertise it or inform you, but it is available.

My dad’s rate has been reset from 14.5 to 10.5% a huge 4% difference. His tenure, which was originally 180 months, and had now gone up to 315 months despite making the EMI repayments for the last 4-5 years (60 months approx) stood slashed at one go to 160 something. Alternatively, one can choose to reduce one’s EMI instead of choosing to reduce the tenure.

For those wondering how such a drastic reduction in tenure is possible, it can happen. In this case, the total EMI was approximately equal to the interest charged in a year and only a very small amount (4-5%) of the EMI was being used to repay capital. With the fall in the rate charged by 4%, this shifted up considerably to 25-27% of the EMI, and this means that a lot more of the EMi is being used to repay capital instead of just service debt and this leads to drastic reduction in tenure.

What were the documentation/formalities required –

1. Cheque for a charge of 0.5% of balance outstanding on the loan+service tax on the same.
This is extremely cheap as I will recoup this charge within 2 months
2. Non-judicial stamp paper of Rs 30 signed by borrower & co borrowers
3. Some sort of an agreement which you will get from the bank itself and has to be signed by borrower & co borrowers
4. All outstanding EMI payments have to be cleared (obviously)

Now I am not sure whether the scheme is available for all home loan borrowers or a particular category, as also the amount of reduction in rates will be the same for all borrowers or not. But give a call to ICICI bank and just ask. It will save you a tonne of money.

 

{ 26 comments… read them below or add one }

Atul June 16, 2011 at 9:06 am

Hi Manshu,

HDFC had similar scheme couple of years back. The charges where 1% of outstanding loan amount. I guess they dont advertise openly but discuss with customers on case to case basis.

Regards

Atul

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pallavi June 16, 2011 at 1:49 pm

HDFC still has the scheme going on.

They charge an amount based on the difference between your home loan rate and the current going rate for a new loan. this difference of percentage is divided in half and that % of outstanding principle is the amount you pay to reduce your interest rate. (DISCLAIMER: This was not explained in detail when I opted for this so my understanding could be wrong)

But I was able to reduce my rate of interest by 3% for roughly a month’s EMI worth.

regards
Pallavi

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Manshu June 16, 2011 at 7:19 pm

Thanks Atul, Pallavi – I’m curious to know if they’ve ever lowered the rate on their own on a floating rate loan?

Any experience on that? Thanks again!!!

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pallavi June 17, 2011 at 12:47 pm

Basically how it worked (for me at least :)) was – when you take a home loan with HDFC (not HDFC Bank), they offer you the loan on their RPLR-discount-offer. At different times this discount % is different. Also boils down to your negotiating skills/circumstances.

Once HL starts, your ROI will be current RPLR (as publicly announced) – (minus) the discount % agreed in your HL agreement.

Over a period of time as rates kept going down and I think especially when the teaser HL schemes came into the market this ‘discount%’ must have gone up.

The teaser rate of SBI got me thinking about shifting my loan to SBI but wanted to avoid dealing with them. So called up HDFC to see if they had this type of a scheme and was able to get my ROI reduced.

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pallavi June 17, 2011 at 1:21 pm

basically the discount % was increased…

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Manshu June 18, 2011 at 8:36 am

Thanks for sharing your experience, and what you did Pallavi – was certainly very helpful for me as I wasn’t aware of a lot of these aspects. Thanks!!!

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Raja June 16, 2011 at 9:20 am

Hi Manshu,

It’s very common. I had faced the same when i tried transferring mine from ING to SBI couple of years back. Basically no bank advertises it. But from time to time depending on the pressure banks are facing in terms of such loan accounts outgo they can provide a discount on the rates. But then 4% reduction is seriously unheard of and just too good a offer 🙂

Regards
Raja

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Manshu June 16, 2011 at 7:22 pm

Hi Raja,

Thanks for your comment – what made you approach them in the first place – just curious, were you approached by another bank of a lower rate loan, or did you read an ad or something?

I wonder what can prompt others to do such a thing.

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Raja June 16, 2011 at 8:11 pm

Hi Manshu,

I had taken a loan from ING in late 2008 for a rate of 10%, which had increased to 11.75% by jan of 2009. This increase appeared a bit too sharp for me and i wasn’t very happy!

Around march 2009 i heard of SBI’s 8% scheme for first 1 year and then market linked rate (around 9.5% at that time) scheme. The 8% rate for first year provided me the incentive to go for the switch as the 3.75% difference in rates between the two meant that i’m very well offsetting the penalty of 2% (negotiated to 1.5%) in penalty to ING.

But now after all that work my rates have come to 11.75% with SBI itself 🙁 Not happy again. But this time i’m hoping to find a better solution 🙂

But overall am very happy with SBI’s transparency, net banking and loan account as OD facility.

Regards
Raja

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Manshu June 17, 2011 at 12:46 am

Thanks for your comprehensive reply Raja.

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Karthik June 16, 2011 at 9:21 am

HDFC too has this. These banks keep increasing spread (ROI = PLR-spread) and it leaves the existing customer’s on higher interest. In this case ROI of 14.5% is at par with personal loan. Rather than getting happy about the future reduction they should worry about the loss which was incurred so far.
I have made this conversion twice with HDFC so far and got 1.5% interest rate reduction within two years. As usual it will never be advertised by HDFC. With private banks it is always better to keep an eye on interest rate and speak to bank for reduction. I don’t think this is the case with PSU banks.

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Manshu June 16, 2011 at 7:22 pm

Thanks Karthik – and you had a floating rate too, which was never reset downwards?

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Subodh June 16, 2011 at 11:22 am

See how it happens. When RBI increases key factors, Floating rate of interest goes up, in this case it gradually went up from 7.5% to 14.5%. The increase in rate is immediate. however, vice versa is not true, for private banks such as ICICI. they dont tell you that rates have gone down. Ideally they should bring it down automatically. But they will charge you (in this case – 0.5% and tax).That too, when you call them up. Otherwise they would keep the same old (high) rate. Come on, Piyush you should understand that it was a floating rate interest and it should come down automatically. Imagine if you havnt contacted them, you would have been paying at 14.5% for entire tenure.
It happened to one of my friends, thats why I know it and prefer public sector banks.Its diffucult to get but all the inital pain is better than such scenarios.

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Sourabh Sharma June 16, 2011 at 11:36 am

I too had similar deals with ICICI bank and Hdfc bank, being a home loan customer of both (I have 2 homes on loan 🙁 ).

Old customer just needs to do a fresh agreement with the bank to switch to current interest rate applicable for new customers. For this, the charges are 0.5% of outstanding principal + service tax & cess, So, they actually re-process your loan as if it was a new loan at prevailing interest rate.

In case of ICICI, my interest rate changed from 12.5% to 8.75% (more than a year back)
In case of Hdfc, it changed from 11.25% to 8.75%. (more than year back) .

Now both the loans have risen to 10.5%. still a lot of savings. The effect is cumulative for the entire loan tenure because the variance is changed.

There are many of my friends who have opted for this option than going thru the efforts of transferring the loan to other bank.

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Manshu June 16, 2011 at 7:39 pm

And how was this triggered? You called them or they called you?

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MGM June 16, 2011 at 1:17 pm

I think it’s only fair to Mr. Modi’s father. Current home loan rates are around 10.5% anyway.

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Raj June 16, 2011 at 3:04 pm

I have utilised this facility twice with HDFC Bank. 2 years back , I paid 1% charge on balance o/s and moved to 8.75% from 10.75%. Again this March , I paid 0.5%(now they hv reduced this amt) and moved from 10.25 to 9.25%. I also came to know, when I thought of shifting the loan to some other Bank and contacted HDFC.

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Pallavi June 16, 2011 at 5:18 pm

Hi, i agree with MGM completely, ICICI bank is currently offering home loan rates at 10.25% only, they were charging a highly inflated ROI from Mr. Piyush’s father and then dont need to be appreciated but penalised for the same. The ROI on a floating rate home loan should match the current market home loan rate, 14.5% is way too much and even fixed home loan rates are available at cheaper rates than that. I would suggest you take it up with ICICI and get your balance adjusted for as long as you have paid EMI’s at anything above 10.5%.

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Subodh June 16, 2011 at 8:12 pm

I agree with 1st part of Pallavi’s comment, they should be penalised. However, taking the matter with ICICI to adjust balance won’t help because they work like this only.
oh by the way, another point to be aware – ICICI and most of private banks follow monthly reducing balance, while SBI follows daily reducing balance!

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FinanceFundu June 17, 2011 at 8:32 am

This is type of reducing Interest rate is called as Refinancing. I think most of the bank offer this kind of provision. Its just like you are closing you existing loan and applying for a New Loan in the same bank. The charges that you pay are like Processing fees for the loan.

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Tripura S June 17, 2011 at 12:01 pm

I got the same offer with ICICI more than a year back when I wanted to switch to SBI. This also came with a fixed rate for 3 years.

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debraj July 13, 2011 at 12:39 pm

4% reduction is a serious one! Im sure there is some catch! Have my home loan HDFC where they were offereing a 1% reduction (BPLR – 3.25% is my present loan and they were offering BPLR – 4.25%) The charges were 0.5% of principal outstanding!

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baalkee June 27, 2012 at 6:58 pm

What ICICI did was nothing great. but banks do it selectively only in case the customer cries foul and desires/demands to shift to other banks at lower rates of interest.

In reality, a benchmark rate being the average of rates charged by all banks for a similar product should be publicised by RBI/IBA on monthly intervals so that the borrowers of different banks are aware of the real interest rates prevailing.

The banks charging higher rates take the convenient route of keep the customers in the dark about the real interest rates and keep charging higher rates to profit unduely form such sharp practices.

You can take the lead and repeat the best rates of interest prevailing in the market/.

Same thing is happening in the sale of gold coins. Some banks like HDFC and ICICI again charge a premium of upto 12% on the cost of gold content where as PSU banks sell similar gold coins at 5-6 % Premium. for a 10 gram gold coin the difference omes to about rs. 2000 per coin. Certainly banks with a difference.

Same thing happens with insurance companies. ICICI Lombard claims to charge upto 25% less premium as compared to other insurers but when you demand that they show hazaar excuses and charge rates similar to or higher than others.

And to top it all they manage to get away with it too because consumers in this country have nowhere to go.

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Saurabh August 30, 2012 at 3:34 pm

Hi All,

HDFC is currently offering ‘Fixed Rate Home loan’ with ROI at 11 % ( 10 L – 75 L).
Please share your opinion on whether, this is a product to go for , considering the future ROI trends?

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Saurabh August 30, 2012 at 3:37 pm

Just to add more information , there is an option to choose for the fixed tenure from 3 – 10 Yrs.. More information on this product is available on

http://www.hdfc.com/loans/hm-loan-features.asp#truefix

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sachin bhor October 13, 2012 at 10:45 pm

im taking a home loan from icici.shud i take offer of fixed or floating rate.im in two minds but stil i think fixed rate shud b more beneficial

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