By Sunil Dhawan, ECONOMICTIMES.COM|Jun 20, 2017, 10.41 AM IST
The competition amongst home loan lenders is getting aggressive. Last month in May, several top lending institutions had reduced their home loan interest rates and are expected to lower them further, given the push to the housing needs in the country.
The drop in the home loan interest rate was in spite of the RBI holding on to the repo rate for the last few months.
The new option
In addition to lowering the home loan interest rates, few banks have started offering borrowers, the option to choose between 6-month reset period and 12-month reset period while taking the MCLR linked home loan.
Since April 1, 2016, when the MCLR was introduced, almost all the banks kept the reset period at 12 months. However, of late few banks have started offering the option to choose the reset period of 6 months in addition to the 12-months period. ICICI Bank has recently started giving the option to choose between 6 months and 12 months reset period. Axis Bank and Kotak Bank are the two other banks offering the 6-month reset period only.
How it matters
In a 12-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in June 2018 only i.e. after 12 months.
In a 6-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in December 2017 only i.e. after 6 months. For the borrower, the MCLR of the bank in December 2017 will be applicable.
In effect, there is a waiting period for the borrowers to see an impact on the EMI’s. Therefore, MCLR linked flexible home loans are sort of ‘fixed’ for a certain period of the loan.
How to choose
Choosing between the two might be a tricky issue and the answer to it may not be a straight forward one. It will boil down to the movement of the interest rate, both in the short-term and in the long-term. “If interest rates are falling, opt for a shorter reset period so that you can avail reduced rates sooner. In case the interest rates are rising, opt for a longer reset period so that your loan burden does not go up for a longer period,” says Navin Chandan , Chief Business Development Officer, BankBazaar.
Rather than looking at the shorter term movement, a long term trend could be of help to a prospective borrower. “In a scenario where a decrease in interest rates is foreseen, it might be better to opt for a shorter reset period,” informs Ranjit Punja, CEO & Co-Founder, Creditmantri.com.
Kotak Mahindra Bank since the beginning is offering the 6-month reset period loans. Sumit Bali, Sr. EVP & Head, Personal Assets, Kotak Mahindra Bank says, “At Kotak Mahindra Bank, home loan rates are linked to 6-month MCLR, thereby the rate offered changes every six months depending on the MCLR movement. Our current 6-month MCLR rate stands at 8.5%. Presently, we offer rates up to MCLR + nil spread.”
However, here is an important point not to be overlooked. “Yes, it’s a fact that home loan rates under 6-month MCLR will be revised and get reset in every six months compared to every year in 12-month MCLR, but the catch here is the markup to the MCLR, which actually adds to the effective lending rate, says Rishi Mehra, CEO, Wishfin.com.
According to Mehra, “You need not only to glance at both the MCLRs (Bank’s 6 and 12-month MCLR) but also the markup. Add the MCLR and markup in both 6-month and 12-month MCLR, and opt the one that has a lower lending rate on offer. For example, ICICI Bank offers a home loan of up to Rs 30 lakh at 6-month MCLR of 8.15% and 1-year MCLR of 8.20%. But the effective lending rate comes out to be equal in both the cases.”
Also, the quantum of loan matters. “Another factor to look at is the quantum of the loan up to which 6-month MCLR is applicable. In the case of ICICI Bank, 6-month MCLR is available for a loan of up to Rs 30 lakh only,” informs Mehra.
Can the reset period be changed
Bringing a change in the reset period may not always be an easy task. Better, if as a borrower, one gets clarity from the lender at the initial stages of taking a loan. “The reset period is typically pre-defined but it might be modified after a discussion with the lender,” informs Punja.
Can the markup change during the tenure
Let’s says, a customer takes a home loan at a certain markup. On the reset date ( after 6 or 12 months as the case may be), there is a possibility that the bank’s markup has changed. “The lenders can make changes in the markup, which gets influenced by the cost of funds to be borne by the banks. As these costs can vary from time to time, there would be changes in the markup accordingly,” says Mehra.
EMIs get reset periodically
In the base-rate era, when RBI reduced the policy rate, both the existing and the new borrowers, expected a fall in the rates with immediate effect. It’s a different story that banks delayed any such rate cut but were prompt in raising them whenever RBI increased the repo rate. There was, however, no reset period in the base rate era.
However, in the MCLR based lending, the interest rate of the home loan (and therefore the EMI’s) gets re-priced on a periodical basis. As per the RBI rules, “the periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.” Predicting the interest rate movement will be highly speculating in nature.
Refinancing a MCLR linked loan
In case, after few years of servicing the loan, one finds the interest rate or the markup too high or would like to switch to another reset period, refinancing the loan with another lender is an option. Mehra says, “Yes, you can switch the MCLR linked home loan to another bank at any time. The good thing is that you can do that without paying any foreclosure charges to the existing lender as it is a floating rate loan. However, you may have to pay a processing fee at 0.5%-1% on the transferred amount. A stamp duty at 0.20%-0.50% can also be charged by the lender.
The possibility of refinancing could, however, be remote. “With respect to changes in MCLR and reset period, on a case by case to basis, lenders might be willing to adjust your interest rates provided you have a healthy credit history. Higher the loan outstanding and better the credit history, the existing lender is likely to be flexible, and lower overall interest rates in order to retain the loan, rather than lose it to competition,” says Punja.
As far as choosing between 6 and 12 months reset period is concerned, look for flexibility and options while selecting and negotiating with the lender. “The offering of home loan on 6-month MCLR is a new phenomenon. So, you need to wait till you understand the pattern of rate offering under 6-month MCLR,” says Mehra.
Whatever reset period one chooses, it’s important to have a systematic partial prepayment plan in place to lower interest burden on the home loan. After all, the early you finish the home loan, higher will be one’s own equity in the house.