1. Still paying higher interest rate on home loan? Here’s what you should do

Still paying higher interest rate on home loan? Here’s what you should do

Although the Reserve Bank of India again preferred to keep the key policy rate unchanged at 6.25 per cent in its recent policy review, this move is unlikely to make much difference to the softening lending rate environment.

By: | Updated: April 11, 2017 2:34 PM
New buyers who intend to buy a piece of property for end-use would benefit the most out of home loan rate cuts.

Although the Reserve Bank of India again preferred to keep the key policy rate unchanged at 6.25 per cent in its recent policy review, this move is unlikely to make much difference to the softening lending rate environment. Experts believe that the abating pressures on inflation, easy liquidity and an increased bank deposit base should help in bringing down bond yields, which may help lower the interest rates further.

In fact, irrespective of rate cuts, borrowers are likely to benefit going ahead as the RBI has reduced the key policy rate by 1.75 per cent since January 2015, while the nation’s leading banks and housing finance companies (HFCs) have also reduced their lending rates since the beginning of this year, resulting in lower EMIs. Moreover, as competition intensifies, this trend is likely to continue in the future also, which will benefit consumers.

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“We’ve seen an industry-wide reduction in lending rates since the end of the demonetisation. Even though the RBI has kept the repo rate unchanged for three review cycles, we’re seeing home loans being offered in the 8.5% range, sometimes lower than that. The SBI recently reduced its base rate to 9.1%, which is still 110 basis points higher than its one-year MCLR,” says Adhil Shetty, CEO, Bankbazaar.com.

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It should, however, be noted that while new home loan borrowers instantly benefit from any cut in lending rates, that is not the case with the existing borrowers.

“New buyers who intend to buy a piece of property for end-use would benefit the most out of home loan rate cuts. The overall property cost for them would reduce, which would make a significant difference in the long run. I think it is the best time for end users to buy property as home loan interest rates are at their all-time low and they are expected to go further down owing to the pressure from the RBI on banks,” says Ganesh Vasudevan, CEO, Indiaproperty.com.

Since the process of searching, finalising and buying a piece of property takes at least few months, property seekers should begin their property search now to seek maximum benefit out of low home loan rates.

Vasudevan says that even though banks have cut rates for new loans, they have been stingy to pass on the benefit of several repo rate cuts by the RBI in the last two years to its existing customers.

No wonder, in its First Bi-monthly Monetary Policy Statement on April 6, the RBI stated that banks have reduced lending rates, although further scope for a more complete transmission of policy impulses remains. Keeping this in view, experts see a further scope for rate cuts.

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It may be noted that even a 25-50 bps rate cut results into a significant amount of savings for new borrowers. For instance, assume someone was planning to take a home loan of Rs 40 lakh for a period of 20 years at 8.50% interest. The EMI would have been Rs 34,713 in this case. Over 20 years, the borrower would be paying Rs.43,31,103 as interest. A 25 bps fall in interest rate, however, would bring down the EMI to Rs 34,083 and the total interest paid to Rs 41,79,830. A 50 bps rate cut would bring down the EMI to Rs 33,458 and the total interest payable to Rs.40,29,825. That’s Rs.1,51,273 saved in case of a 25 bps cut and Rs 3,01,278 saved in case of a 50 bps cut.

 

Current rate

New rate

Old EMI

New EMI

Difference (EMI)

Old interest

New interest

Difference (Interest)

8.50%

8.25%

34713

34083

630

43,31,103

41,79,830

1,51,273

8.50%

8.00%

34713

33458

1255

43,31,103

40,29,825

3,01,278

So far as the existing borrowers are concerned, they should take a call on shifting their loan to another lender after weighing the pros and cons of this move. As a home loan holder, if you’re paying a higher interest rate by continuing with the base rate regime, you may want to consider switching to MCLR-linked loans that are more responsive to rate cuts.

“If you’re looking to move to transfer to a home loan with a lower interest, broadly you have two options. One is to transfer within your own bank. This may carry minimal charges and little to no paperwork. You can bargain for the rates with your bank. The second is to transfer to another bank. This would involve a little bit of paperwork and would need you to incur costs such as processing fee, loan balance fees etc. You should make a thorough assessments of your costs before making the transfer. You should make use of online aggregators and calculators to correctly assess costs and make an informed decision,” says Shetty.

In April 2016 a new mode of bank lending was put in place, called Marginal Cost of Funds-based Lending Rate (MCLR). Under this method banks have to declare overnight, monthly, quarterly, half yearly, annual, two yearly and three-yearly interest rates every month and customers can choose how frequently they want to change their interest rate. Experts say that in a low interest rate market like today’s, customers should go for the MCLR method as it protects them from future rate hikes for a specific time period.

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“To make a significant difference in the amount, existing home loan customers are recommended to switch from their current base rate system of lending to the recently-introduced MCLR system. This would save them a substantial amount as with home loan rate cuts by all the banks, the gap between the base rate at which old borrowers are paying interest and the current MCLR rate is widening,” says Vasudevan.

For instance, you might have availed your home loan at the rate of 10 percent about 5 years ago, which today stands at 8.5%, which clearly shows a difference of 1.5% in the interest rate and may help you save substantially in case of switching from base rate to MCLR. However, you need to select your lender carefully so that you don’t have to repent later on!

  1. Loan Services
    Apr 12, 2017 at 7:59 pm
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