There has been a cut in repo rate by 135 basis points this year courtesy the RBI and banks in India have only passed on up to 30 basis points to borrowers in terms of a rate cut. Most Indian banks have also cut their one year MCLR which is used for home loan pricing, by approximately 25-30 basis points over the last few months.
There are a number of factors why banks are not reducing lending rates and so home loan borrowers have to think of other alternatives to reduce their home loan EMI burden. Those who are first time borrowers will be able to compare the rates which are offered by different banks and they will be getting the lowest possible home loan rates. Those who are existing home loan borrowers also have the option to switch their home loans to new lenders and likewise ensure lower EMIs and interest rates.
However, it is important to consider all aspects before switching borrowers because taking into account all the other factors, this might not be feasible for everyone. Hence, some things need to be kept in mind before making the switch.
Here’s what you can do
- Home loans which are issued before April 2016 are based on prime lending rates or base rates and these older loans are based on higher rates than MCLR based or repo rate based loans. There are no incentives to cut these rates and so one has to check if the loan is linked to the MCLR, base rate or PLR. Likewise, the difference in interest rates should be carefully compared.
- One should only consider shifting his/her home loan to a different bank if the rates of the new bank are lower by at least 1% or more than the existing bank rate. One also needs to factor in the cost of shifting the loan because usually a processing fee of 1% is charged by banks on the outstanding principal amount. One should only consider switching loans if savings due to the lower interest rates are higher than the costs that are involved for this switch.
- One needs to find out the total expected savings and the outstanding loan amount along with the remaining loan tenure. If the remaining tenure is higher, say around ten years, then the 1% reduction will amount to considerable savings in the future.
- It is important to talk to one’s current lender to find out whether the home loan interest rate can be reduced or not. You should then decide whether to shift the loan to another lender or not. Most banks will be ready to talk once you demand a loan statement and tell them that you plan to shift your loan. The relationship manager of the bank can also be approached to negotiate the rate reduction. Banks will however negotiate with you only if they are convinced about you making the switch.
- In some cases, even if the shift has been made to a new lender with lower rates, the future rate reduction might be slow with this institution too. This is due to the reset clauses for home loans under the MCLR system. The 1-year MCLR will be changed after 12 months and assuming a shift to a new lender, the interest rate may come down to 8.55% from 9.65% being paid earlier by the borrower. However, because of the reset clause, the loan rate will not come down until April 2020 in this scenario even if the MCLR is reduced to 8.4% next month. This is just an indicative example.
These are some of the points you need to keep in mind when it comes to getting home loan interest rates reduced in the current scenario.