Paying high EMIs (Equated Monthly Installments) amidst coronavirus pandemic times where economic activities are restricted is very difficult to cope with it. To survive COVID-19 induced storm of financial distress without hurting our household budget is the top priority of every person. However, this situation does not seem to be easy to execute, but with some level of awareness, we can save few EMIs and overall household budget imbalance.
The central bank of India -RBI has made loan lending more transparent by linking loan rates to external benchmark rates from October 2019. Unfortunately, most of the banks do not inform their home loan customers about this. Due to the uninformed situation, the person who has taken a home loan at a higher rate than current benchmark rates continue paying large EMIs (high interest and principal amount).
For instance, Raman has taken home loan in 2006, was linked to the base rate, with effective home loan interest being 12.2%. He took the loan of amount INR 14.5 lakh and paid his EMIs regularly for over 13 years. Despite paying EMIs for over 13 years, his outstanding principal was still substantial at INR 11.03 lakh. Raman has paid interest amounting to over INR 17.16 lakh to date, but principal repaid was merely INR 3.12 lakh.
At present, several housing finance companies and banks were charging new home loan borrowers around 7.2% – 9.5% annually. Raman could have saved a huge amount of money and paid lesser number of EMIs. He should have negotiated with his lending bank on interest rate and switched to Repo Linked Lending Rate (RLLR). The repo linked lending rate is the lending rate which is linked to the RBI’s repo rate. In case of lending based on RLLR, home loan interest rates go up or down as per movement in the repo rate.
The person who had taken home loan between April 2016 and September 2019, borrowers’ loans were likely linked to the marginal cost of funds-based lending rate (MCLR). If a person had taken home loan even before that, it is likely to be pegged to Base Rate, which is an internal lending metric to price home loans. MCLR (Marginal Cost Lending Rate) determines the lending rates for commercial banks. MCLR has replaced the earlier Base Rate system on 1st April 2016, it determines rates of interest for loans.
So, one should ask his/her existing bank to move your home loan from MCLR to RLLR and could have saved money amidst coronavirus pandemic.