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Interest rates: How cuts affect loans under process

Change in a bank’s base rate is quite crucial to an under-process loan.

home loan
OFTEN people buy real estate to reduce their income tax burden. It sounds great, but you should never make real estate investment decisions based solely on tax considerations.

Change in a bank’s base rate is quite crucial to an under-process loan.

If a customer applies for a loan and before getting the first disbursement, there is a change in the bank’s lending rate then the previous rate will not be applicable. The disbursement would happen at the new rate.

Given the recent changes in banks’ lending rates, for customers whose loans were under process and did not receive their disbursements till October 3 or till the date on which the bank/housing finance company changed its rate, the disbursement for the customer will then happen based on the new rates.

Bankers say that the old rates that get quoted at the time of application are not relevant because the loan approval process usually takes a lot of time and the interest rates may change significantly during that period. “The only rate that matters is the rate at the time of first disbursement as the loan gets linked to the base rate and spread at the time of disbursement,” said a senior official with a housing finance company.

If there are cuts in repo rate and base rate before the subsequent disbursements then the benefits of the cut will be linked to the base rate at which the initial disbursement happened. Any change by the bank in its spread for new customers do not get passed on to existing customer as the spread gets linked for the tenure of the loan.

Only if the customer decides to switch over from old rate to new rate (base rate + spread) being offered to new customers, by paying a switch over charge, will the customer be treated as a new customer and his spread will change.

All customers should go and check with their banks and housing finance company as to the difference between the rate that they are paying and the rate being offered to the new customer and if there is a notable difference then they should look to switch over from the old rate to the new rates.

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