Letter to Bank to Reduce Home Loan Interest Rate (Format)

Banks rarely lower the rate on an old home loan on their own. New borrowers often get a lower rate than people who borrowed a few years ago, even at the same bank, because the margin the bank adds on top of its benchmark was set when each loan was sanctioned. A short, specific letter is usually how existing borrowers get that gap closed.

Why your rate can be higher than a new borrower's

• Since 1 October 2019, RBI has required new floating-rate home loans to individuals to be linked to an external benchmark, usually the repo rate. Your rate is that benchmark plus a spread fixed for your loan.
• When the repo rate moves, your rate moves with it, but your spread does not. If the bank now offers new borrowers a smaller spread, your loan stays costlier.
• Older loans linked to MCLR or base rate move more slowly than repo-linked loans. Under the same RBI circular, borrowers who can prepay without charges (which includes floating-rate home loans taken by individuals) can switch to the external benchmark without any charges or fees; other borrowers can switch on mutually acceptable terms.
• The spread itself is not supposed to rise at the bank's whim: the credit-risk part changes only if your credit assessment changes substantially.

Source: RBI circular RBI/2019-20/53: External Benchmark Based Lending (4 September 2019)

The letter (copy, fill the brackets, send)

To, The Branch Manager / Home Loans, [Bank name], [Branch]. Date: [DD/MM/YYYY]. Subject: Request to reduce the interest rate on my home loan, loan account no. [XXXXXXXX].

Dear Sir/Madam, my home loan, account no. [XXXXXXXX], has about ₹[outstanding] outstanding and is currently charged [current rate]% a year. I have paid every EMI on time since [month, year]. Your bank's current rate for new home loan borrowers with my profile is [new rate]%, and I have received an offer of [offer rate]% from another lender for a balance transfer.

I would prefer to continue with your bank. I request you to reduce the rate on my loan to [requested rate]% under your conversion / switch facility, and to tell me the one-time fee for doing so. If my loan is linked to MCLR or base rate, I request that it be moved to your repo-linked rate without charges, as provided in RBI circular RBI/2019-20/53 (4 September 2019). Kindly reply in writing within 15 days. Yours faithfully, [Name], [Mobile], [Email].

What makes the bank say yes

What switching costs

Most banks charge a one-time conversion or switch fee to lower the rate on an existing loan, either a small percentage of the outstanding amount or a flat sum, plus GST. Ask for it in writing before you agree, and compare it with what the lower rate saves you over the rest of the loan. There is no new stamp duty, legal or valuation charge when you stay with the same bank, which is why repricing is usually cheaper than moving.

If the bank refuses or ignores you

• Escalate the same letter to the bank's grievance redressal officer, then to the RBI's complaint portal if there is no reply. Note that a bank declining to cut a rate is a commercial decision; a complaint works best on delays, unclear charges or a reset not passed on.
• Check what a balance transfer would actually save after the new lender's processing fee, GST, stamp duty and legal costs. On a small balance with few years left, it often saves nothing.
• A floating-rate home loan taken by an individual for a non-business purpose can be closed without a foreclosure charge, so the old bank cannot penalise you for moving.