Skip to main content

What’s A Base Rate?

 

JULY 1, 2010, was a significant date for banks and borrowers. That was the day when the new regime for benchmarking home loans – the base rate system – came into being. Now, interest rates on all loans extended post July 1 are linked to the new system.


   The new system was introduced by the Reserve Bank of India (RBI) in response to complaints from home loan borrowers of the partisan approach adopted by banks while raising home loan rates. Banks were accused of making attempts to entice new borrowers with lower rates even as the benefits of a benign interest regime were sparingly passed on to existing borrowers. And in a hardening rate scenario, banks rarely hesitated to increase rates for old borrowers. The base rate system was put in place with the objective of enhancing transparency in loan pricing and ensuring fair treatment to all borrowers. Now, banks are required to review their base rates at least once every quarter and ensure that any changes made are passed on to all classes of borrowers.


   After the RBI raised its key policy rates in its quarterly monetary policy review on January 25, 2011 several banks have taken the cue and hiked their respective base rate as well as benchmark prime lending rate (BPLR). Borrowers whose loans are currently linked to PLR can take a call on moving to base rate and the bank cannot charge any fee for effecting the transfer. While it is yet to be seen if the new benchmark will indeed benefit old borrowers, many are of the opinion that switching over would certainly result in noticeable gains. For the purpose, you need to get in touch with your bank and inform them that you intend to adopt the new system. There is no standard format prescribed for making the switch. Your bank, though, may ask you to submit the relevant application form or a letter stating your intent. Once you accept the new terms, the bank will have to facilitate the transition.


   If you are one of those whose home loan continues to be linked to PLR, you would do well to analyse your current situation before switching to the base rate. For instance, if you are very close to clearing the entire loan, say a year from repaying the entire amount, you need to compare the present home loan rates – the one benchmarked to the base rate as well as the one linked to the PLR. If the latter is lower, you can look at continuing with it. However, if the last instalment due is several years away, you should definitely consider making the switch, even if the PLR linked rate is lower than the one tied to the base rate. This is simply because the latter is a more transparent mechanism and is likely to reflect changes in the interest rate environment effectively. Lastly, if you have taken a home loan under the 'teaser' or 'special' home loan schemes that were in vogue till recently, you needn't take any action at all. Once the fixed-rate period expires, your new rate will be automatically linked to the bank's base rate then.

 

Popular posts from this blog

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Mutual Fund Review: L&T MIP

        This fund won't deliver chart-topping returns. However, over the long run it will not disappoint and end up beating the category average The fund has seen numerous changes at the helm. When Katare took over in October 2007, he made dramatic alterations to the portfolio. On the equity side, he increased the number of stocks to 11 (November) from 2 (September). On the debt side, he added Certificates of Deposit (CDs), while earlier Treasury Bills (T-Bills) and cash accounted for 88 per cent (September 2007) of the portfolio. In November 2007 he exited T-Bills for good. The results impressed. In the last quarter of 2007, it delivered 12.83 per cent (category average: 6.12%). In 2008, the first quarter performance was nothing short of impressive, a return of 9.93 per cent (category average: -3.97%). While other players increased their portfolio maturity, Katare maintained a low maturity profile. While the average maturity of the category was 2.81 years that quarter, th...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

Reconfigure investments to reap benefits in DTC

    Investing for tax benefits under the new Direct Taxes Code ( DTC ) will be different in several ways from what taxpayers are familiar with right now. This will require some reconfiguration in the nature of investments for the investor and they need to be ready to tackle the changes that will come about once the new DTC is implemented from financial year 2012-13.One area of interest for most taxpayers is the manner in which they can extract the maximum tax benefit. Here is a look at the situation and also how it changes from the existing position. Basic deduction: At present, there is a deduction of Rs 1 lakh that is available for an individual when they make investments under specified areas such as provident fund, public provident fund, national savings certificates, equity linked savings scheme and insurance premium, among others. This benefit is available under Section 80C of the Income Tax Act. This has been replaced by a new Section 68 under the DTC where there is a deduct...

Term insurance

Term insurance may not be the most-marketed product by life cos, but it’s a must-have in today’s risk-prone lifestyle WHEN was the last time your insurance agent sold a term plan to you? It’s not a very popular policy among agents, as their commission in absolute terms is low because of the low-premium. Just as agents have their self interests in mind while selling, you need to make your own decision about your insurance needs, which are unique to your family. COST ADVANTAGE A term plan is pure protection. It is the cheapest type of life insurance policy. But what you see might not be what you get, most insurers have a range of health parameters for standard rates. If any of your health parameters — weight, blood pressure for instance fall outside this range, you will pay more. For some companies, the standard range is very narrow. EARLY BIRD GAINS A 30-year-old will pay 15% more premium than a 25-year-old. At 40, the premium is double of what is applicable for a 25-year old, points...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now