RADHIKA MERWIN | 20th Feb 2017 | The Hindu BusinessLine
With the RBI signalling the end of the money easing cycle, sharp fall in rates is unlikely
There has always been a lot of fanfare and expectation around the Reserve Bank of India’s monetary policy. Borrowers make a hard case for rate cuts. Depositors cringe every time rates head south. And banks are chided for being tardy in lowering lending rates.
The reaction to the recent policy was however more muted though, with the RBI keeping rates on hold. Also, after reducing policy rate by a whole 175 basis points since the beginning of January 2015, the RBI appears to have changed course, signalling the end of the rate cut cycle.
Here’s what borrowers — old and new — should do to ensure they get the best deal on home loans, before the tide turns.
Are you waiting for rates to fall further before taking a home loan? Sorry to dash your hopes, but it may not be the best choice to play the waiting game .
Lending rates have already dropped by nearly one percentage point over the last one year,thanks to the new marginal cost of funds-based lending rate (MCLR) that the central bank introduced in April last year. This new lending rate structure has forced banks to lower rates at a faster pace.
Starting April 2016, lending rate on your floating rate home loan has been pegged against the MCLR which replaced the erstwhile base rate. As a borrower, you need not be bogged down by the complex difference between the two. Suffice to say that banks use the latest rates offered on deposits for MCLR computation, and hence the rates have fallen sharply in the past year, particularly post-demonetisation.
While the RBI has indicated a wee bit of a headroom to cut rates, don’t count on it and lose out on best deals. SBI, in January, shook up the home loan market by lowering its one-year MCLR (against which home loans are priced) from 8.9 per cent in December 2016 to 8 per cent in January 2017. Other banks too followed suit.
Bank of Baroda’s home loan at its one-year MCLR of 8.35 per cent seems the top draw for now. This home loan product is unique as it links the rate on your home loan to your credit score. If you have been settling your bills and loan payments on time, and have a credit score of 760 and above, then you are eligible to get home loans at this rate.
Other leading banks, for now, offer only one rate for all borrowers, irrespective of the credit score. Central Bank of India and Union Bank of India offer home loans at 8.5 per cent and 8.6 per cent respectively. Others such as SBI and Axis Bank price their home loans at 8.65 per cent.
Rates have fallen by one percentage point over the past year
Rate hikes cannot be ruled out in the medium term
Few banks offer waivers to switch to cheaper loans
Make the switch
While new borrowers have had a lot to cheer, old borrowers — who have taken loans against the erstwhile base rate prior to April 2016 — have not had much respite. While banks have been slashing MCLR, they have not lowered their base rate. SBI, for instance, after holding its base rate at 9.3 per cent from October 2015, has only recently reduced it marginally by 9.25 per cent. This is still far higher than the one-year MCLR at 8 per cent.
Hence, old borrowers still pay a far higher rate on their home loans. In case of SBI, few borrowers still pay 9.5 per cent interest (spread of 25 basis points over base rate).
Banks, however, allow borrowers to switch into the new MCLR regime at a cost. The switching charge is 0.5 per cent of the loan outstanding in most cases (minimum of ₹10,000). If you have an outstanding loan of ₹50 lakh with SBI, with a remaining tenure of 15 years, you could save over ₹4 lakh of interest over the entire tenure of loan.
But do take note of the switching options that each bank offers, before deciding to move. Remember that lower the loan outstanding and tenure, lower the benefit. Hence, it will make less sense to switch if you are at the fag end of your loan tenure.
If you are looking to switch from one bank to another, keep in mind that you have to foreclose your loan, and then approach a new bank for a fresh loan. Here, banks usually charge a processing fee, which ranges from 0.5 to 1 per cent of the loan. There could be an additional service charge too. But do look for waivers offered by banks.
Whether you have a home loan under the erstwhile base rate or MCLR, time you braced yourself for possible rate hikes too. If inflation risks heighten, rate hikes could be in the offing over the next 18-24 months.
If the new MCLR structure has forced banks to lower rates at a faster pace during the rate cut cycle, it can no doubt pinch you quicker when rates move up. This is because lending rates may increase at a steeper pace under MCLR.
But this is all the more reason why you should move to MCLR now. The far cheaper rates currently offered under MCLR (compared to base rate) will help cushion the rise.
Also, borrowers may find some solace in the reset clauses under the MCLR structure. Unlike under the base rate system where a revision in base rate was immediately reflected in the lending rates of all loans benchmarked against it, under the MCLR-based pricing, lending rates are reset only at intervals corresponding to the tenure of the MCLR.
In case of home loans, since the loans are benchmarked against the one-year MCLR, lending rates will be reset every year.
(This article was published on February 20, 2017)