SBI has come out with options of financing new and existing home loans at 8%. This move has been widely welcomed by consumers new and old alike. While it is greatly appreciated the numbers need to be individually analyzed for the benefits it can result in for the consumers.

The new loans may be grabbed but only keep in mind this rate is applicable for one year. After one year it shall be based on the prevailing rates at that time. That is a fair risk one may be willing to take. At this point of time we quite do not see the other banks getting to this level.

But if you are looking at refinancing your current loans you need to carefully examine the numbers to see if it makes financial sense. The costs of refinancing would include prepayment penalty and the processing fees whereas will have a lower interest burden and probably a lower EMI.

For Example if the loan outstanding of Rs. 40 lacs at 11% for 15 years with your current financier and there is an option to refinance at 8%,the emi would get reduced from Rs. Rs. 45,465 to Rs 38,226, a drop of Rs7,239. While this may appear to be significant it is imperative to exactly know the costs behind it. Typically most banks charge 2% as prepayment fee and the new bank will charge a Processing fee. In the current case assume that you pay Rs. 80,000 as a prepayment fees and Rs 10,000 as a processing fee, you have run up a bill of Rs 90,000. This cost will take close to a year to recover on an EMI basis. So effectively it will be one year before you see the real benefit. On further the initial outlay would return interest income, the prepayment penalty and processing fees are not tax deductible. As per the scheme the interest rate would get reverted to the prevailing market rates which could be higher. So it becomes nearly back to where it all started.

Further the calculation does not take into account the subsequent reductions in the floating rates with the existing financier. Also the 8% is fixed for the year and locked. One needs to weigh all the options before changing from your current financier.

A few points to note

· While refinancing, estimate the savings based on the initial outlay of processing and prepayment costs

· While opting for floating rate loans check how your rates will change when the PLR change.

· Refinance only when there is a sustained benefit over a period of time. Evaluate all the pitfalls of refinancing including lock in period, refinancing options available and

· Finally do start negotiating. It is going back to a buyers’ market and hence do not shy away from negotiating