Updated: Nov 03, 2017 | 11:07 IST | ET Now Digital
Good news for State Bank of India (SBI) customers and for those willing to take a home loan in the near future. SBI, the country’s top lender by assets, has made its home loans cheaper. The bank has reduced home loan interest rates by 5 basis points to 8.30 per cent per annum. With this reduction, SBI’s offering in the home loan segment has become the lowest in the market, as the bank claims.
The new rates are effective November 01.
The effective interest rate for all eligible salaried people will be 8.30 per cent per annum for loans up to Rs 30 lakh. Rates have been reduced by 5 bps point in all the brackets. Over and above of 8.30 per cent rate, an eligible home loan customer can also avail an interest subsidy of Rs 2.67 lakh under the Pradhan Mantri Awas Yojana scheme.
At present, for a new customer there’s now the possibility of taking bigger loans or incurring lower interest costs in making their dream home purchase a reality.
Before you finalise the loan ask these five key questions to get a good deal on your home loan
1. Negotiate rate of interest
Lenders mostly define the interest rate in a minimum and maximum range, the actual rate charged depends on your eligibility criterion. As a borrower you have the ability to negotiate a better interest rate.
Financial advisers say you can do this not just by comparing your loan options, but also by improving your eligibility by adding a co-borrower and combining the co-borrower’s income with your own.
2. Buy a home loan only after comparing
Before you zero in on a loan, compare between the different loan products available in the market.
Look at the equated monthly installments (EMIs), the interest rates, the processing fee and other related charges to choose the perfect loan. These days home loans offered online, you can always explore with a few clicks.
Look at the base rate, the margin offered, what is the maximum tenure offered, and how is the eligibility calculated and most importantly whether a property similar to yours has been funded by this lender earlier.
3. Fixed rate or floating?
Home loans can be extended either on fixed or on floating rates. If a home loan is taken on fixed rate then the interest rate will not change during the entire loan period and the borrower continues to pay the same EMI throughout the loan term.
All new floating rate bank loans today are linked to the MCLR, whose interest rate automatically resets at fixed intervals. This is beneficial for customers since interest rates have been trending downwards of late.
If the interest is expected to fall then opt for a floating rate and if it is expected to rise then opt for a fixed rate loan.
One can pre-close the loan ahead of its original tenure. If you are on a floating interest rate, no charge will be applicable. If you are on a fixed rate, there may a charge applicable.
4. Understand your borrowing capacity
People often decide to pay high EMIs thinking the loan load would come down with time due to annual increases in their income. However, their incomes may or may not rise with time. Therefore, they must borrow to the limit where paying EMIs would not stretch their finances.
5. Additional costs
When you take a home loan remember that interest is not the only cost you have to bear; there are certain additional costs too.
Every time you apply for a loan with a bank or non-banking financial institution, you are charged a percentage of your loan amount as processing fee. The amount may vary from 0.5 per cent to 1 per cent of your loan amount.
Legal fees are charged by banks or NBFCs to ascertain the legal status of any property. Usually, legal fees are applicable for home loans or loan against property.
Depending on your loan type, you may be charged an amount for prepayment of your loan. If you do not repay your loan EMIs on time, you will be charged a late payment fee. The late payment fee will depend on your lending bank or NBFC and the type of loan.
Our Bureau | MUMBAI | NOVEMBER 8 | Hindu Business Line
The clamour to be the cheapest home loan provider is getting louder. A week after SBI said it is charging the lowest interest rate on home loans following a 5-basis-point (bps) cut in its marginal cost of funds based- lending rate (MCLR), Bank of Baroda (BoB) has joined the bandwagon.
On Wednesday, BoB said it is offering the cheapest home loan rate (at its MCLR of 8.3 per cent) for ‘best rated’ customers across different categories, irrespective of the loan amount. The tenure is up to 30 years for all categories — salaried and self-employed.
‘Best rated customers’ are those with a credit score of 760 and above. For customers with a credit score below that, BoB, based on risk rating, charges a mark-up of up to 100 bps over its MCLR.
“The lowest rate of interest currently offered by other public sector banks is applicable only to a small category of customers such as salaried women seeking a loan of less than ₹30 lakh. However, a male entrepreneur with pristine credit rating seeking a home loan of more than ₹75 lakh may end up paying a rate of interest of 8.5 per cent and above at other banks,” BoB claimed in a statement.
Last week, SBI said that following a 5 bps reduction in its MCLR, its home loan rate is the lowest in the market. One bps equals one-hundredth of a percentage point.
(This article was published on November 8, 2017)
By Sangita Mehta | ET Bureau | Updated: Oct 31, 2017, 07.48 PM IST | Economic Times
MUMBAI: Country’s largest bank, State Bank of India (SBI), announced a 5 basis point cut in its benchmark lending rates across maturity, which first cut after 10 months.
The bank has pegged its benchmark rate to 7.95% for a term of one year with effect from November 1 against 8% year charged earlier. Most banks sharply reduced marginal cost of lending rates (MCLR) in January 2017, post demonetisation exercise after they saw huge inflow of deposits.
The reduction in the lending rates also comes within weeks of Rajnish Kumar, taking charge at the helm for a term of three years. The bank will now pegged MCLR to 7.70% for overnight borrowing and 8.10% for three years. Other largest banks like ICICI Bank and HDFC Bank too may announce a token cut in the lending rates.
The new rates will immediately benefit the new borrowers. However, the existing customers may have to wait for a while since under the MCLR system the interest rates charged to the customers is locked for a fixed term.
For home loans, the interest rates are fixed for a term of one year and thus the existing borrower will benefit at the end of the lock-in period.
For salaried women borrower seeking loan of less than Rs 30 lakhs, the bank will now charge 8.30% and for loans between Rs 30 lakhs and Rs 75 lakhs it will charge 8.40%.
For non-salaried women borrower seeking loan less than Rs 30 lakhs the bank will now charge 8.40% and for loans between Rs 30 lakhs and Rs 75 lakhs it will charge 8.50%. For all other borrowers, the bank charges 5 basis points more above the rates charged to women borrower.
The reduction in rates comes at a time when the Reserve Bank of India is revising the formula of pricing the loans. An RBI committee headed by Dr Janak Raj has suggested that interest rate on loans be pegged to external benchmark rates arrived at by market trading rather than leaving it at the discretion of each bank which appear to be coming up with some formula that would defy the best rates for most customers.
While announcing the monetary policy in October 4, the RBI had said, “Arbitrariness in calculating the base rate and MCLR and spreads charged over them has undermined the integrity of the interest rate setting process. The base rate and MCLR regime is also not in sync with global practices on pricing of bank loans.”
By Saloni Shukla – ET Bureau | Updated: Aug 25, 2017, 12.05 PM IST | Economic Times
MUMBAI: A Reserve Bank of India appointed committee on Household Finance has suggested that banks link their home loan rates to the RBI’s repo rate, the rate at which it lends to banks, instead of the Marginal Cost of Funds based Lending Rate (MCLR), which the banks follow now.
“Banks should quote loans to customers using the RBI repo rate rather than based on their own MCLR rates,” the committee report chaired by Dr Tarun Ramadorai, Professor of Financial Economics, Imperial College Business School, London, suggests. “To facilitate ease of comparison for prospective borrowers at the point of purchase, every floating-rate home loan should be quoted to prospective borrowers in the form of a market-wide standardised rate + spread as opposed to MCLR + spread.”
While these recommendations need not be accepted by the regulator, it comes when the RBI had hinted it was unhappy with the rate transmission under the MCLR regime. In the past three years the central bank has reduced the policy rate by 200 basis points, but the weighted average lending rates have fallen by 145 basis points. A basis point is 0.01 percentage point.
“The experience with the marginal cost of funds based lending rate or MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory even though it has been an advance over the earlier base rate system,” Viral Acharya, deputy governor RBI had said on August 2. “We have constituted an internal study group across several clusters to study various aspects of the MCLR system and to explore whether linking of the bank lending rates could be made direct to market determined benchmarks going forward. The group will submit the report by September 24th 2017.”
The committee has also recommended that all banks use the same reset period of one month for loans. Under the current system, floating rate loans have a fixation period of roughly one year. The report argues that the current system impedes monetary transmission mechanism and does not allow borrowers to immediately benefit from interest rate drops.
“If the bank decides to link home loans to the one-year MCLR, it should pass through any changes in the one-year MCLR rate to borrowers every month,” the report says. “And if the bank decides to link home loans to the six-month MCLR, it should pass through any changes in the six-month MCLR rate to borrowers every month.
Source : https://goo.gl/kBksEU
RoofandFloor | AUGUST 09, 2017 10:00 IST | The Hindu
Nothing compares to the joy you experience when months of patience leads to the discovery of your dream home. This is followed by a home loan application, with the final choice being governed by the interest rates on offer.
While the current home loan interest rates available in the market have seen a reduction, even a little difference between the rates offered by the lender can be the difference. You might feel like you managed to strike gold with the rate you received from your lender, but here are a few things you can look out for to reduce your interest rate even further.
While a shorter home loan tenure may increase your EMI, it ensures that your principal amount is repaid earlier. Since the rate of interest is calculated on the principal, once the bank recovers the principal amount, the absolute interest pay out decreases marginally. However one must be aware that higher EMI reduces your ability to borrow in future. With the regulator ruling prepayments on floating rate home loans should not be charged any penalty, the borrower can higher prepayments / EMIs keeping the base tenure longest.
Set EMI targets
Make it a goal to pay an extra EMI every year. This will help to get to the finish line much before than expected. Not only that, in the months your finances seem to have a better cushion, add the surplus to your EMI as it will help reduce your principal amount as well as the interest.
Increase your EMI annually
With your annual salary appraisal, get into the habit of increasing your EMI every year by at least 5%. This will allow you to repay the principal much faster and reduce your interest.
Refinance your housing loan
If you come across a financial institution whose housing loan interest rate is lower than the one being offered by your current lender, then think about switching to the other lender.
Your interest repayment burden can easily be reduced by refinancing your home loan at a lower rate of interest. However, before you take the plunge, do check the legal fee and the prepayment penalty associated with the process. It would be wise to do a cost analysis to make sure that the savings from a lower rate of interest are higher than the amount spent during the refinancing process.
Move to marginal cost of funds based lending rate
Post-April 2016, all banks moved from base rate to MCLR or marginal cost of funds based lending rate, as it allows borrowers to benefit from changes in the rate of interest.
If you took a loan before April 2016, then ask your bank to switch your loan to MCLR. Banks tend to levy taxes as well as a conversion fee of 0.5% on the outstanding amount that needs to be repaid, so a cost analysis would again be beneficial.
Though every borrower tries to avail the lowest possible rate of interest, make sure the option you settle for fits comfortably with your monthly financial budget. While your aim should be the repayment of the principal amount at the earliest, don’t set an EMI amount that starts to seem like a burden. Once that happens, you are bound to miss payments!
This article is contributed by RoofandFloor, part of KSL Digital Ventures Pvt. Ltd., from The Hindu Group
By Kavya Balaji | July 18, 2017 | Bank Bazaar
You have chosen your dream home and the project is approved by both banks and Housing Finance Companies (HFC). You need a Home Loan. Which lender should you go for? Are HFCs genuine? Are HFCs well regulated? Do they have fair loan practices? Will they provide standard services? All these questions might be playing in your mind. Here, we try to answer some of those questions for you.
Who supervises HFCs?
Unlike popular perception, HFCs are not unregulated. They are regulated by the National Housing Bank (NHB). HFCs need to register with NHB and the latter regulates and supervises them. There have been talks about the Reserve Bank of India (RBI) taking over but nothing is on the ground till now. However, NHB has been quite proactive in ensuring that Home Loan borrowers rest easy. These include steps like abolishing prepayment charges for floating rate loans, putting a cap on Loan To Value (LTV) ratio and making sure that HFCs have done proper provisioning for their bad loans. So, it is not right to say that HFCs are unregulated and are free to fix their own interest rates. They are well regulated and have standard industry practices when it comes to services.
What about their interest rates?
HFCs follow what is known as ‘Benchmark Prime Lending Rate (BPLR)’ model. They will fix an interest rate based on their average cost of funds. The loan rate that is fixed by HFCs will be at a discount to the BPLR.
There are two issues here. The BPLR is based on past cost of funds/interest rates and is not forward looking. Therefore, HFCs might be slow in passing on interest rate cuts to customers. Another point is that some of the HFCs might not be transparent with their BPLR.
Now, do banks offer better interest rates than HFCs? Sometimes, they do. This is because banks follow the Marginal Cost of Lending Rate (MCLR). Here, RBI ensures that the interest rate cuts made by the central bank are passed on to bank customers through the bank’s MCLR as quickly as possible.
However, note that there are HFCs that are competitive and do offer interest rates comparable to banks. Consider this: HDFC limited, one of the most popular HFCs, offers Home Loans starting at 8.5% while State Bank of India, the most popular bank, provides Home Loans that start at 8.65% unless you’re a woman. For women, SBI offers loans at 8.5%. HDFC has a standard loan process and the interest rates are transparent too.
So, HFC or bank?
You might think that at the end of the day, what matters is how quickly the firm/bank is able to pass on interest rate cuts as we are now on a downward interest rate cycle. Dies that mean you should choose a bank? Wrong!
Understand Home Loan is a long tenure loan. Most Home Loans stretch beyond 10 years. Given this scenario, when interest rates start increasing some years down the line, both banks and HFCs will pass on interest rate hikes quickly. Also, you might have to pay a heavy conversion fee for getting the lower rates now. Some HFCs actually charge a lower conversion fee than a bank.
Another important point that you need to understand is that interest rate cuts are passed on more quickly to new borrowers rather than existing ones. In case there are interest rate hikes, these will be passed on quickly to both new as well as old borrowers. So, passing on interest rates won’t matter as much in the long run. Then?
How expensive is that loan?
It doesn’t matter whether you take a loan from a HFC or a bank as long as you get competitive interest rates and terms. What would matter are the processing fees, prepayment fees and the foreclosure fees.
Typically Home Loans are taken by people in their 30s and are closed within 10 to 12 years. There are hardly a handful of people who let their Home Loan run till 20 years. This is because as people grow in their career, their salaries go up over a period of time and the EMIs seem smaller. So, they would rather repay the loan quickly then have a higher outgo in the form of interest. That is precisely why you need to check the prepayment and foreclosure fee. Heavy prepayment fees will mean an expensive loan. Same goes for foreclosure. There are several HFCs and banks that don’t charge fees for prepayment or foreclosure, even for a fixed rate loan. Consider this factor before zeroing in on a Home Loan provider. Some lenders have a waiting period before which you cannot prepay. Check this too, in case you want to use your yearly bonuses to prepay your Home Loan.
Most of the times, fixed rate loans become floating rate loans after a period of time. You have to go through the terms and conditions of the loan to see how interest rates might change. Another important point to note is whether a top up loan facility is available. Since a Home Loan is with collateral and the value of your home tends to go up over time, it is easy to get a top up loan on your Home Loan. They work out cheaper than Personal Loans. If your Home Loan provider is able to give you a top up loan on your Home Loan, it will be very useful if you need funds many years down the line.
So, there are multiple factors that you need to consider before choosing a Home Loan provider. Here’s a list:
- Interest rate offered
- Fixed or floating
- Processing fee
- Part-payment charges
- Foreclosure fee
- Conversion fee
- Top-up loan facility
- Service standards
Source : https://goo.gl/qf6Ypo
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.