Coping up with the rise in home finance cost may be a challenge for millions of homebuyers this year. The Marginal Cost of Lending Rate (MCLR) or the minimum interest rate of a bank under which it cannot lend has been increased by 5-10 basis points by all the major banks as well as housing finance corporations (HFCs). Though it is not clear whether the hike is a beginning of periodic increase in basis points or is it going to be stable in the long term, it may play a big role and should be considered by homebuyers looking for home loans to fund their dream homes.
The interest rates within the economy are expected to go up, which is quite evident from the 10-year Government Security (G-Sec) yields. Hike in the G-Sec yield was announced in 2017 from 6.41 per cent to 7.40 per cent. The current value stands at 7.29 per cent. There are several financial institutions with investments in G-Secs owing to which they have exceeded their Statutory Liquidity Ratio (SLR) requirement.
In order to fill the gap, the MCLR was hiked and thus in order to make up for the increase, banks revised their cost of funds upwards. Moreover, several banks have recently increased their fixed deposit rates in order to push the cost of funds further. Since cost of funds play an essential role in determining MCLR, the rate of MCLR has been increased. This, however, has led to uninspiring deposit growth which has, in turn, led banks to pay more.
Keeping these factors in mind, before going to financial institutions to seek home loans, borrowers should first keep a track of inflation and liquidity to understand how the interest rates might tread in the future. This is also significant considering that the impact of the rise on the customer can only be gauged depending on if the loan is being taken against MCLR’s base rate. However, note that certain banks have not increased their base rate or MCLR such as the State Bank of India. The major point highlighted is that much of the impact might be on new loan applicants as against the already existing applicants who might not be concerned with the market changes until their next interest date.
What should homebuyers do? In case there is enough money to spare, they should first and foremost make advance pre-payment on the loan interest in order to be not impacted severely by market changes. The other scenario could be opting for smart home loans which have their own overdraft facility. The principal amount decreases when the excess funds are transferred to the account which helps the applicant to have a fund as a cushion in case of any emergency. It is important for borrowers to be positive about the interest rate offered and one should stick to their current financial institution if the difference in rates provided by others is not much. If the best rate, as claimed by the financial institution, is not in tandem with the other home loan providers, then the time is ripe to make a switch.
It is to be underlined that a further hike in MCLR could impact interest rates in the next instalments considerably. The total interest payment can also increase if the loan tenure is made longer instead of increasing the EMI. In fact, the reverse may help the borrower to save more. Instead of increasing the loan tenure, the borrower should ask the bank to increase the EMI amount which will prove more cost-effective.
These are the potential ways through which homebuyers can sail through the hikes in home finance costs in the coming months.
(By Honey Katiyal, Founder & CEO, Investors Clinic)