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Reasons Why Interest Rate Related Changes Should Not be the Sole Factor of Your Home Loan Decisions


When news of the RBI’s MPC meeting travels on a bimonthly basis, the vast majority of borrowers, particularly those who have mortgages, eagerly anticipate the statement that will follow. The average man, particularly those who have house loans, believes that any change in rates made by the RBI will swiftly impact their next EMI, regardless of whether the adjustment is an increase or a decrease. This is the belief even while the meeting does contain a lot of economic significance.

On the other hand, this is not always the case. In order to provide additional clarity regarding this procedure and the measures that borrowers of Home Loans are required to take, we explain why rate fluctuations shouldn’t be the sole element impacting your decisions about home loans.

Repo rate’s impact on bank lending rates

The central bank RBI lends money to the several commercial banks in the nation at the repo rate when those banks run out of cash. First, borrowers need to comprehend how banks determine loan interest rates. The repo rate is just one of the variables affecting the SBI MCLR Rate. When determining their lending rates, banks also take into account their cost of capital, operating expenses, and tenor premium. The interest rate for mortgage loans is influenced by these three variables as well as the repo rate.

The internal benchmark interest rate (IBIR) below which a bank cannot make a loan is called the marginal cost of funds based lending rate (MCLR Rate). Changes in the RBI’s policy rates have a greater positive impact on borrowers under the MCLR-based system than they do under the base rate system. All banks must assess and report their MCLR each month for all tenures, per a directive from the RBI.

When assessing the markup (spread) that banks may charge above their MCLR Rate, consideration is typically given to the size of the loan in question and the customer’s credit history. As a result, after accounting for the SBI MCLR Rate plus any applicable markup, the effective rate of interest—or the actual rate of interest the borrower would be required to pay for the loan—would be calculated. Existing house loan borrowers should be aware that, in situations with rising interest rates, their current EMIs won’t change right away but rather as the loan’s reset date draws near.

Reset the number of loans and their duration.

The MCLR regime’s pre-determined loan reset dates ensure that, regardless of changes in the banks’ lending rates during the interim period, the borrower’s EMIs won’t be directly impacted by the house loan interest rate, which does not change until and unless the upcoming reset date arrives. In instance, if they chose a longer reset time, this helps the borrower pay less interest as interest rates are climbing.

Additionally, a longer reset period gives the borrower more time to plan ahead before the subsequent reset date. According to the RBI, banks are permitted to make loans with reset dates that correspond to either the loan’s initial disbursement date or the SBI MCLR Rate review date; this information must be specified in the loan agreement. Additionally, there must be no more than a year between resets.

When is the ideal time to transfer your balance?

Home loan borrowers should use the utmost caution whenever the RBI adjusts the repo rate rather than deciding hastily to transfer their money. Although one of the factors used to calculate MCLR is the repo rate, it is not the only one. As a result, an increase in the repo rate won’t always result in an increase in the lender’s MCLR. The borrower must consider the “total savings in interest cost” before switching to the lender offering a cheaper rate, even if the lender’s MCLR Rate has increased and your prior home loan’s interest rate is slated to increase as the loan reset date draws near.

How is the overall cost calculated?

Instead of simply selecting the lender offering a lower interest rate than the interest rate on a house loan, borrowers should make sure they analyse the rates offered by different lenders and figure out the potential savings in interest expenditures upon transferring the loan to the chosen lender. This is more important than choosing the lender offering the lowest interest rate.

Consider any applicable fees before filing an application for a balance transfer. Your request for a balance transfer is typically treated by the new lender as a brand-new loan application, and as a result, expenses such as processing fees and administrative costs may be assessed. To avoid reducing the overall benefit from lower interest expenses, avoid ignoring these expenditures. Only proceed if the net overall savings once such fees and charges are considered are considerable. If not, think about sticking with your current lender while attempting to bargain for better terms and services.

The advantages of HLBT, in addition to the overall interest savings, should not be overlooked.

Better loan features with new lender: Because the new lender will consider your request for a balance transfer to be a new loan application, the terms and conditions will also change. This is because you want a reduced home loan interest rate as well as better loan features. The borrower may request that the new lender lengthen the loan’s term if they want to lower their monthly payment. The borrower may also ask the lender for permission if they need a larger loan sum than is already due in order to make repairs, renovations, etc. to their residential property.

Additionally, borrowers who are presently making payments on a home loan under the base rate regime may consider a balance transfer to a loan with an interest rate tied to the SBI MCLR Rate regardless of whether the policy rate or the home loan rate supplied by their current bank changes. Contrary to banks, the majority of housing finance companies (HFCs) employ the PLR (Prime Lending Rate) regime to establish their home loan lending rates because they are not required by the RBI to adhere to the MCLR Rate regime.

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