The repo rates have been increased by the RBI (Reserve Bank of India) by around 25 basis points for 2 out of the 3 last monetary policy reviews conducted by it. The increasing interest rates equate to higher gains for those with bank deposits but they mean higher interest payouts for those who have loans. Repayment for home loans also becomes more expensive in this scenario. In this current situation, if you are looking for a home loan, you should have a clearly defined strategy in place.
The MCLR (marginal cost of funds based lending rate) is dependent on the cost of funds in case of banks. This is mostly through market borrowing and deposits made by customers. Private sector banks usually have higher rates of deposits. Private lenders usually have a higher MCLR. Housing finance companies have also steadily increased their home loan interest rates over the years. NBFCs and HFCs have witnessed growth by tapping self-employed loan customers and those looking for affordable housing units.
You can first look at public sector banks since there is greater transparency with regard to changes in rates. However, they have lengthy documentation and other procedures. Banks have a spread charged over the MCLR which depends upon the customer’s risk profile. Some banks also offer loans at MCLR rates to those with excellent credit scores. With an increase in interest rates, the loan tenor is usually increased by HFCs and banks alike while the EMI remains the same. However, a longer tenor means more payment of interest overall. The rates are reset on the basis of whether your home loan is tied to the 6 month of 1 year MCLR. If you have a good credit score, you can negotiate with your bank or HFC to give you some exemptions on charges like administrative and processing fees. In case of floating interest home loans, prepayment penalties are no longer charged.
When choosing your lender, make sure that you read the fine print carefully. Choose a lender which is offering you comparatively lower rates of interest tied to the MCLR along with flexible repayment options if that is what you require. Check for lenders who have fast processing and documentation processes if you want to purchase your home swiftly. Additionally, check whether your credit score can help you negotiate better terms and conditions.