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State Bank of India (SBI), India's largest lender has decided to allow its customers to switch their existing loans  to lower rates. There is a small catch - the bank will charge a one-off fee of 1% of the outstanding loan amount for the switch over.

This is good news for large number of home loan borrowers whose home loans are linked to the prime lending rate which is around 14.75% at present. Currently the floating rate of bank is linked to the base rate which is ten per cent. SBI's current floating rates vary from 10.5 per cent for up to Rs 30 lakh loan, 10.75 per cent for between Rs 30 lakh and Rs 75 lakh, and 11 per cent for loans above Rs 75 lakh.

This will give an option to existing home loan borrowers who are on the prime lending rate to switch over to the new floating rates that are much lower than prime lending rates. There is no cap on the loan tenure or the amount of the loan to reprice loan to a lower rate nor there is any time limit for the switch over.

RBI had earlier prompted banks to remove the pre-payment penalty. There were lot of borrowers who were making inquiries about shifting their loans to other banks. Hence, SBI took this decision to retain existing customers by helping them lowering their interest burden, which will in turn help the bank avoid possible delinquencies.

HDFC is also planning a similar move and is likely to announce this in the coming few weeks.

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