Tagged: Interest Rate Reset

ATM :: Still paying interest on home loan at old rates? Cut EMI by switching to MCLR-linked rate now

By Narendra Nathan, ET Bureau| Mar 20, 2017, 04.06 PM IST | Economic Times

ATM

Just like bank depositors, those borrowing from banks also need to be alert in order to protect themselves against unnecessary charges. Given below are the most common areas where banks tend to overcharge customers.

If you compare the interest costs of your friends and relatives on bank loans—housing, auto, personal loan, etc.—you will realise that they vary drastically. And these costs not only vary across banks, but across customers of the same bank—and not because of varying customer credit scores. Some banks have been offering loans at cheaper rates to new customers, while charging old customers a higher rate. “Banks continue to follow the discriminatory practice of offering differential rates for existing and new customers and this should stop,” says Ramganesh Iyer, Co-founder, Fisdom.

As the banking regulator, the Reserve Bank of India (RBI) should stop this discriminatory practice, which it is partly responsible for creating. The RBI introduced the MCLR (marginal cost based lending rate) method, effective April 2016, to enable a faster transmission of rate cuts to bank customers, replacing the base rate method that was being used by banks to set their lending rates—earlier the base rate had replaced the less transparent prime lending rate (PLR). Now, borrowers who took loans 4-5 years back, and did not ask their bank to switch to the newer regime, are still linked to the PLR. Those who borrowed when the base rate became the benchmark are stuck with the base rate. Now, while banks are giving new loans at cheaper rates, based on MCLR, old customers are still paying higher rates.

“Since banks offer different rates, it is better to visit some common aggregator and understand the lowest rates available in the market. This will help you bargain better with your bank,” says Dipak Samanta, CEO, iServeFinancial.

To reduce your interest outgo, you need to shift your loan from base rate or PLR to MCLR. Shifting to MCLR now is a good move, say experts. “Though RBI’s stand is neutral now, rates may not go up from current levels. In fact, they may come down later—after an year,” says Balwant Jain, investment expert. Bear in mind though, in an upward moving interest rate regime, MCLR will move up faster than base rates, just like it falls faster in a reducing interest rate regime.

Still paying interest on home loan at old rates? Cut EMI by switching to MCLR-linked rate now

Loan reset charges
There are two types of loans: Fixed and floating rate. Floating rate loans are supposed to mirror the rise and fall in interest rates set by the RBI. But this rarely happens. While banks increase rates immediately, they are very slow in cutting them. The introduction of new benchmarks has also turned out to banks’ advantage. They charge customers for shifting from one benchmark to another— from PLR regime to base rate regime to MCLR regime now. The charges are levied to meet the expenses involved in drafting and registering new agreements—stamp duty, registration charges, etc. Though these expenses vary across states, ordinarily they won’t be more than 0.2% of the outstanding amount. However, some banks try to profit from this also by charging around 0.5%.

Should you go for a reset even if it involves a small charge? Yes. The amount you save will be significantly higher over the years. To illustrate, consider the case of a home loan borrower with Rs 50 lakh outstanding loan amount and a 15-year tenure. A 1% fall in interest— from 9.5% to 8.5%—will bring his EMI from down from Rs 52,200 to Rs 49,250, a reduction of Rs 2,950 per month. A total saving of Rs 5.31 lakh—significantly higher than the reset fee of Rs 25,000 even at the maximum rate of 0.5%. You may be able to get this reset cost down by negotiating with your bank. A threat of shifting to another bank often works. “Another way is to approach the branch manager. Based on the value of your relationship, they can reduce or even waive charges,” says Samanta. The ‘value of relationship’ here is crucial. If you have multiple relationships with the bank—savings bank account, credit card, other loans, investment, etc.—you have a valuable relationship and will receive a favourable treatment.

Source : https://goo.gl/FBRCpI

ATM :: What does a reset clause in a home loan agreement mean?

While availing a loan from a bank – whether it’s a floating or a fixed rate loan — one should get all the relevant details cleared from the bank. Along with the loan application form, banks are also required to provide full information about the interest rates applicable during the tenor of the loan.
By: Navneet Dubey | Published: March 20, 2017 5:20 PM | The Financial Express

ATM

While availing a loan from a bank – whether it’s a floating or a fixed rate loan — one should get all the relevant details cleared from the bank. Along with the loan application form, banks are also required to provide full information about the interest rates applicable during the tenor of the loan.

The bank should also inform the borrower about the fees and charges payable for processing (whether a floating or fixed rate loan), penalty rate of interest for delayed payments, conversion charges for switching loans from floating to fixed rates, existence of any interest reset clause, time by which a decision on the application will be conveyed to the applicant and any other matters which will affect the interest of a borrower.

“Home loan reset clause refers to the particular clause in your home loan agreement stating the period after which your fixed rate home loan will get converted to a floating rate loan,” says Naveen Kukreja – CEO & Co-founder, Paisabazzar.com

How does a reset clause apply?
An interest rate reset clause simply means that when applied, it allows a bank to review the rates and reset them at the end of a specified period of time – based on the interest rates prevailing at that time.

“The reset clause applies to home loan borrowers opting for mixed rate home loans. Under the mixed rate system, your interest rates will remain fixed for a teaser period, usually for the first 2–4 years of your tenure, after which your loan gets converted to a floating rate regime. Remember that the fixed rate levied during the teaser period will be 10–20 bps higher than the floating rates prevalent at the time of the loan sanction. Similarly, borrowers should be prepared for regular increase or decrease in their EMIs during the post teaser period, depending on the prevalent interest rates,” says Kukreja.

Even your floating rate charged during the post-teaser period might be different from a borrower opting for floating rate loan with the same date of loan sanction. Borrowers should carefully go through the charges and rates of mixed rate home loans and compare them with the floating rate loans before deciding the type of interest rate,” he says.

One should also know the following aspects before opting for a floating interest rate:

  • The base rate mentioned by the bank to which the floating rate of interest is associated with.
  • The agreement clauses which specify a minimum interest rate clause.
  • The reset dates mentioned by the banks, if any, like January 1, April 1, July 1, etc.
  • Whether the margin can be changed during the tenure specified in the loan or not.

Source : https://goo.gl/GEP3ye

ATM :: Did you know: most new home loans ride on 1-year MCLR

When banks cut MCLR, they usually do it for all the five MCLR baskets
Vivina Vishwanathan | Tue, Oct 11 2016. 04 35 PM IST | LiveMint

ATM

After the Reserve Bank of India cut repo rate by 25 basis points (bps), some banks such as Indian Bank and Canara Bank Ltd cut their marginal cost of funds based lending rate (MCLR) and their base rate. State Bank of India Ltd (SBI), the country’s largest lender, had cut its MCLR before the monetary policy announcement. MCLR is the new benchmark lending rate at which banks lend to new borrowers. The existing borrowers are still on base rate and have the option to switch to MCLR. Currently, MCLR is 5-10 bps lower than base rate. One basis point is one-hundredth of a percentage point.

MCLR-linked loan

When banks cut MCLR, they usually do it for all the five MCLR baskets. For instance, when ICICI Bank reduced its MCLR by 5 bps, its overnight MCLR and 1-month MCLR came down to 8.85% each, the 3-month MCLR to 8.95%, 6-month MCLR to 9.00% and 1-year MCLR to 9.05%.

Out of the five MCLRs that banks publish on their websites, it is either the 6-month or the 1-year MCLR that is used as the benchmark rate for new home loan borrowers. For instance, SBI has benchmarked its home loan to 1-year MCLR, whereas Kotak Mahindra Bank Ltd has linked it to 6-month MCLR. Kotak Mahindra Bank’s 6-month MCLR is 9.20% and SBI’s 1-year MCLR is 9.05%. This also means there will be a reset clause in the loan document, which is linked to the tenure of the MCLR your home loan is linked to. In case of SBI it will be 1-year and for Kotak Mahindra Bank it will be 6 months.

Things to remember

All MCLR-linked loans come with a spread, which is the margin that you have to pay above the MCLR. For instance, ICICI Bank offers 1-year MCLR at 9.05%. For a home loan of up to Rs5 crore, the spread is 25 bps, which means your home loan interest rate will be 9.30%. For home loans above Rs5 crore, the spread is 50 bps above the 1-year MCLR.

Usually the spread is higher for larger loans.

Source: https://goo.gl/H65Q9a