Home loan EMIs sometimes seem like albatrosses around our necks don’t they? (assuming you’ve read The Rime of the Ancient Mariner which we had in school) Loans are anyway a pain to bear but of course, buying a home outweighs it all. After all, a home is not just security for the family but also a major investment, one that will easily surpass whatever you spend on the home loan in most cases.
In a development that seemed like good news for home loan borrowers, the Reserve Bank of India (RBI) cut repo rates two times in succession, bringing the total cut to around 50 basis points. However, when it comes to our banks, they’re not always in a giving mood (they have their own reasons and stresses to blame). So, if your bank is not lowering the rate of interest on your home loan, what do you do to snip off your home loan EMI? Read on to find out more.
Current Market Scenario
In the current scenario, banks are clearly not willing to lower lending rates by a sizable margin. As a result, you have to take the off-beat path (don’t worry it doesn’t lead into a swamp!). Here’s what the current situation looks like from a layman’s perspective:
- The RBI has cut repo rates by 50 basis points overall.
- Banks have simply adjusted lending rates and not reduced likewise.
- Most banks have lowered the MCLR (marginal cost of funds based lending rate) by 5-10 basis points.
- 1-year MCLR is used by a majority of banks for sanctioning home loans.
- Banks are not passing on rate cut benefits to consumers since lower repo rates do not reduce their cost of funds. The latter is not linked to the repo rate which is only used whenever banks have tighter liquidity.
- Rates of interest on savings and current accounts have largely remained the same.
- RBI’s reduction in rates of interest did not lead to any similar lowering of interest rates of financial products such as small savings schemes.
- The country does not really hold a candle towards deposits with floating rates. As a result, since rest of interest rates for FDs only takes place after a particular duration, the cost of funds will not reduce for most banks even if deposit rates are cut.
What you can do in this scenario
Now, with banks unwilling to get into lending rate reduction territory, you have to think of other ways. Here’s what you can do in this scenario:
- You should always check the interest rate on your home loan and see whether it is tied to the base rate or prime lending rate among earlier regimes. MCLR only arrived in the year 2016 and there is a high chance that you may have a home loan linked to previous regimes.
- Check out rates of interest available at other banks. You may consider a home loan balance transfer in case the rate at any other bank is considerably lower as compared to what you are paying currently. However, take into account fees and charges including the processing fee along with possible prepayment penalties. Switch your home loan only if you get savings which are higher than the costs.
- You should always take into account your outstanding home loan amount and the tenor that remains prior to deciding. Only go for a home loan balance transfer if you are in the initial stages of the loan where the EMIs are majorly repaying the interest component. You will thus get the benefits of lower rates over a sustained time period. If you are in the last few years, consider sticking with your current lender since the EMIs are majorly paying off the principal component and not interest.
- You can always negotiate with your current lender for lowering rates of interest or consider a switch to MCLR if you haven’t shifted yet.
- You may consider a balance transfer in case your present rate of interest is higher than rates at other banks by 1%.
- Privilege customers can always count on their exalted status (for want of a better word!) to negotiate on interest rates. Many lenders will consider lowering rates if they feel that you are seriously looking to make the switch.
- Additionally, do not expect a huge reduction in interest rates from the new financial institution as well. The MCLR reset clause varies from one bank to another and the reset period has to be covered prior to rates coming down.
Additionally, you can start putting your yearly or half-yearly (if you’re that lucky!) bonus to good use by making home loan prepayments. This will naturally lower your home loan EMI or the tenor of the loan. This will help you save on interest costs greatly over the long haul. If you keep the EMI same after prepaying your home loan to some extent, you will be further slashing off the principal and getting higher savings on interest.