HDFC hikes prepayment charge for switching bank

New Delhi: HDFC has made it expensive for its home loan borrowers to switch over to other banks. The institution has started charging borrowers up to three per cent of the outstanding loan if they decide to prepay their loans by borrowing from another lender.

The mortgage giant has been concerned by its borrowers switching to public sector banks like State Bank of India (SBI), which offer lower interest rates.

SBI recently stirred the market with a special scheme that offers home loans at eight per cent for the first year but it is only for new borrowers.

HDFC Chairman Deepak Parekh had a few days back termed the SBI's new loan scheme as a "gimmick".

However, some analysts believe that SBI's eight per cent home loan rate is not a real threat to HDFC, which still offers borrowers a lower overall interest cost.

Analysing the cost benefits offered by the public sector lender’s special home loan rate for the borrowers and the competition it poses to HDFC, equity analysts at brokerage firm Edelweiss Securities in a report said that the scheme would not be "a material threat to HDFC".

While short-term interest savings offered by SBI is "more or less offset by HDFC’s competitive edge" on factors like ease and quality of service and process time, the average interest rate for the full tenure of the loan also works out to be lower in case of HDFC, they noted.

Under SBI’s special scheme, the rate would be fixed at eight per cent for the first year, while it would increase to 10.25 per cent from the second year for loans up to Rs 30 lakh and to 10.75 per cent for loans bigger than Rs 30 lakh.

This would give an average rate of 9.92 per cent for loans up to Rs 30 lakh with a repayment period of 20 years, as against HDFC’s prevailing lending rate of 9.97 per cent for a similar loan, Edelweiss said.

Loan switching means a borrower can reduce his loan costs by switching to a bank with a lower rate of interest.

Most lenders charge a penalty of up to two per cent of the outstanding loan amount for switching a loan

The new lender normally charges a processing fee of about 0.5 to one per cent of the loan amount to take over the loan.

(With inputs from PTI)