Home loan rates have registered a steady increase over the past year, resulting in higher equated monthly instalments (EMIs) for most existing home loan borrowers. India’s largest lender – State Bank of India – had increased its one-year marginal cost of funds-based lending rate (MCLR) by 20 basis points (bps) to 8.15 per cent on March 1, 2018, three months before the Reserve Bank of India (RBI) hiked its repo rate. In November 2018, SBI’s MCLR stands at 8.50 per cent, reflecting a 55 bps increase since the end of February 2018. Other lenders, too, have followed more or less the same trajectory.
Further increases cannot be ruled out. Central banks across the world continue to raise their policy rates, and RBI may also go for a rate hike soon. Various macroeconomic factors, such as the price of crude oil, foreign exchange rate, inflation, RBI’s monetary policy and movements in bond markets can create further upward pressure on home loan rates.
Home loan interest rates vary widely depending on the lender and also on the borrower’s credit profile. It’s possible that one borrower may be paying a 10 per cent interest rate or more while another could be paying close to 9 per cent. After the introduction of MCLR, the existing rates for bank borrowers are lower than for someone who has a loan from a non-banking financial company (NBFC). Existing borrowers, whose interest rates on home loans are at least 50 basis points more than what major banks are charging at present (see table: Best rates on offer), should consider home loan balance transfer (HLBT). Opting for a balance transfer will help them save cost – they will be able to either lower their EMI or their tenure.
Lower your EMI: The primary purpose of opting for a balance transfer is to save on interest cost. Assume that you have an outstanding home loan of Rs 3 million. The lender is charging you an interest rate of 10 per cent a year and you have a residual tenure of 20 years. If you transfer the outstanding home loan to another lender for the same tenure at a lower interest rate of 9 per cent, you will save around Rs 470,000 over the entire tenure. You will save Rs 1,959 each month as the EMI
will come down to Rs 26,992 from Rs 28,951 earlier.
Opt for the new regime: All fresh bank home loans sanctioned since April 2016 have been lent under the MCLR regime. Housing finance companies (HFCs) and NBFCs still use the prime lending rate (PLR) as the benchmark for deciding their loan rates. Compared to the PLR system, the MCLR regime is more transparent and results in faster transmission of policy rates.
Unlike HFCs, banks have to mandatorily review their MCLR every month. The MCLR system also offers a higher certainty of interest rate as your bank can change your lending rate only on a pre-determined reset date. The interval between two reset dates cannot be greater than a year, and the MCLR prevalent on your reset date remains applicable till the next reset date of your loan, irrespective of any changes in your bank’s MCLR during the interim period. Thus, if you have availed a home loan from an NBFC, you can opt for a balance transfer to shift your existing home loan to a bank and benefit from the advantages of the MCLR regime.
Use balance transfer if you need a top-up: Many lenders offer top-up home loans while approving an HLBT application. This loan amount would be over and above your existing outstanding. Moreover, just like personal loans, top-up home loan proceeds can be used for any purpose, such as for renovating or extending your house, going on a holiday, buying a car, and so on. The interest rates for these loans are also usually lower than on car loans, personal loans, loans against securities, etc. You can also use the top-up loan to consolidate all existing debt. Say, you have a home loan at 10.5 per cent and a personal loan at 18 per cent. You can take a top-up loan and consolidate these two loans. The interest rate on the top-up will be much lower than on the personal loan.
More convenient terms and conditions: A balance transfer is a new loan. No lender would like to lose a borrower with an impeccable track record. Those opting for balance transfer can, therefore, negotiate terms and conditions. These borrowers, for example, can negotiate a lower EMI and a longer tenure or shorter tenure or for changing the MCLR reset period. HLBT can be a good opportunity to get a home loan on more favourable terms and conditions.
Be mindful of charges: As your new lender will consider your HLBT application as a fresh home loan application, it will undertake the usual documentation and other approval-related procedures associated with fresh home loan applications. You may, therefore, incur additional charges, such as processing fees, administrative charges, etc, during the HLBT approval process, which could cost you a substantial sum of money. Deduct those charges from the savings made on interest cost to find out the net savings from the transfer process. Opt for the HLBT only if the net saving is substantial, or else continue with your existing lender.
MCLR reset period matters: While most banks offer one-year interest rate reset period for home loans under the MCLR regime, many also offer a reset period of six months. A longer reset period will reduce your interest cost during a rising interest rate regime as there will be less frequent increases in your interest rates. The converse will be true in case of a falling interest rate scenario. In the present rising interest rate scenario, opt for a longer reset period.
The writer is head – home loans, Paisabazaar.com