Even if you shift your loan to a new lender which is offering lower rates, future rate reduction will be slow there too
New Delhi: Despite a 50 basis points cut in repo rate in two back to back policy meetings by the Reserve Bank of India, banks in India have hardly passed on this rate cut to their borrowers. Most of the banks have cut their one-year MCLR, which is used for pricing home loans, by 5-10 points in the last two months.
While there are different reasons behind banks not cutting lending rates, home loan borrowers have to think of alternative strategies to reduce their home loan EMI burden. New borrowers have the options to compare rates offered by different banks and get the best deal but existing home loan borrowers do not have this option. In such a case existing home loan borrowers can follow the below-mentioned strategy to reduce their home loan EMI.
– Homes loans issued prior to April 2016 were mainly based on prime lending rate or base rate. Home loans based on these older rate regime are higher than the market rate as they were fixed by banks in a non-transparent way. Also, banks have no incentive to cut these rates. So first you should check if your home loan is based on MCLR or base rate or PLR and what is the difference in interest rate currently offered by banks and what you are paying.
– Consider shifting your home loan to a different bank if rates offered by competing banks are significantly lower than your existing one (more than 1%). But don’t forget to incorporate the cost of shifting your loan in your calculation (banks typically charge a processing fee which is up to 1% of the outstanding principal). Some banks also charge a pre-payment penalty. Consider switching your loan only if savings due to the lower interest rate is higher than the costs involved in switching the loan.
– To find out the total expected savings, find out the outstanding loan amount and remaining loan tenure. If the remaining tenure is high (suppose 10 years), then a 1% reduction in interest rate will result in significant savings. If you check your loan repayment schedule, you can see that most of your EMI payment will be going towards the interest component in the early stages of the loan repayment. But in the last few years, the interest component will be low and principal will be high.
-You should talk to your current lender for reducing your home loan rate before you decide to switch your loan. Most banks will start talking if you demand a loan statement, telling them you need it to shift your loan. You can also approach your relationship manager to negotiate a rate reduction. Banks will reduce rates only if they are convinced that you will shift.
– Even if you shift your loan to a new lender which is offering lower rates, future rate reduction will be slow there too. This is because of the recast clause. Banks usually align their reset period of MCLR-based loans with that of its period. For instance, one-year MCLR is usually reset after a year. Assume that you shift to a new lender and get a good rate of 8.5% as compared to your existing rate of 9.65%. Even if the new bank cuts its one-year MCLR to 8.4% next month, your loan rate won’t come down till April 2020 because of the recast clause.