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.
Should you take a home loan from a bank or an NBFC?You would find NBFCs more willing to lend even if you have a poor credit score
Adhil Shetty | June 10, 2017 Last Updated at 22:13 IST | Business Standard
Lending rates have trended downwards over the last two years. Currently, several lenders are offering home loans at an interest rate of 8.35 per cent, way lower than the 10-11 per cent rate that prevailed four years ago. For customers this translates into a lower Equated Monthly Installment (EMI) on an existing loan, or allows them to borrow more to finance a bigger home. As they begin the process of short listing a loan provider, customers may find themselves wondering whether they should borrow from a bank or an NBFC (non-banking financial company). Here’s a look at some of the key criteria that will help you make this decision.
MCLR vs PLR
All new loans with floating interest rates offered by banks are now linked to the Marginal Cost of Lending Rate (MCLR). This departure from the base rate regime began on April 1, 2016. The MCLR serves as a bank’s lending benchmark, upon which they charge an interest rate spread. For example, for home loans up to Rs 30 lakh, a leading bank has a spread of 35-40 basis points above its one-year MCLR of 8 per cent. An MCLR-linked loan clearly mentions the intervals at which its interest rate will automatically change. In a falling interest rate scenario, this allows customers to receive RBI-mandated rate cuts in a transparent, time-bound manner. This wasn’t the case with the base rate-linked loans where transmission of rate cuts was weaker.
On the other hand, loans by Housing Finance Companies (HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime Lending Rate (PLR), which is outside the ambit of the RBI. While banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions. NBFCs and HFCs are free to set their PLR. This allows NBFCs greater freedom to increase or decrease their loan rates as per their selling requirements. This suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. This also needs to be understood in context of a customer’s credit score, explained below.
Loan to value ratio
The actual cost of property acquisition typically goes up to 105-110 per cent of the property value, including cost of stamp duty, registration, and an assortment of payments towards brokerage, furnishing, repairs, etc. Based on where you are in India, you may pay between 3 and 11 per cent of the property value as registration cost. Banks are allowed to fund up to 80 per cent of a property’s value. For example, if you are buying a property worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks. The other 25-30 per cent of your fund requirements would have to be met by you. Often, these last mile costs weigh heavily on the final decision to buy a property. Both NBFCs and banks are not allowed to fund stamp duty and registration costs. However, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount as per his eligibility, thus giving the NBFC an edge over competition.
Both banks and NBFCs may bundle products. For example, it’s not unusual for lenders to sell a loan protection insurance plan along with a home loan. The insurance plan helps settle the loan in case the borrower were to pass away during the tenure. Both banks and NBFCs have cross-selling targets. While banks have a much larger range of products to sell, NBFCs push more aggressively to sell third-party products like insurance to bring in more profitability per customer. Compared to banks, NBFCs have a smaller customer base. They have fewer branches and operate in fewer locations. As a result, there is an increased focus on profitability per customer. Customers need to evaluate whether the bundled products are useful to them. If not, they can refuse them and save costs.
Today, there is heightened focus on customers’ credit scores. Increasingly, the interest rate you pay on your loan is linked to your credit score. For example, a leading bank had recently offered its best rates to customers with a CIBIL score of 750 or more. You needn’t wait to apply for a loan to find out your score. You can access one free report a year by visiting the websites of credit rating agencies such as CIBIL or through third-party credit report generators.
If you scan the loan market, you will see that NBFCs have more relaxed policies towards customers with low credit scores. However, with a low score, both banks and NBFCs will likely charge you a higher interest rate. Loan seekers can make the best of both these options. A customer with a low score may start with a loan from an NBFC. Through timely repayment, he can improve his credit score. After this, he may meet a bank’s eligibility criteria and may transfer the loan balance to the bank. If the outstanding loan amount at this point is small, it’s better to continue with the NBFC.
A home loan is typically a long-term commitment with significant interest costs. If you borrowed Rs 50 lakh at 8.6 per cent for 20 years, your total interest paid over the loan tenure will be Rs 54.89 lakh, which is more than the principal borrowed. Therefore, loan holders look to reduce their interest outgo through timely pre-payments. An overdraft (OD) loan facility helps in this regard. An OD loan is linked to the customer’s bank account in which he can park surplus funds. The surplus over the EMI amount is treated as pre-payment towards the home loan, thus bringing down the overall loan liability and interest charged on the balance. Moreover, the customer can still withdraw the surplus as and when he requires it. At present, only banks provide the OD loan facility and NBFCs don’t. This facility is useful to families with the ability to generate regular surplus income, such as a working couple. It is also useful for someone who may be in frequent need of short-term funds, such as a businessman who can withdraw this surplus based on his needs.
Paperwork and processing
Banks have more stringent paperwork requirements for home loans. This is not necessarily a bad thing for the loan seeker. In lieu of the greater scrutiny, he stands to receive an attractive interest rate. NBFCs are known for relaxed paperwork policies and faster processing. For example, in Bengaluru banks will not finance properties that do not have a ‘B’ Khata, but NBFCs will.
The writer is CEO, BankBazaar.com
By Narendra Nathan, ET Bureau| Mar 20, 2017, 04.06 PM IST | Economic Times
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.
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
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)