[ecis2016.org] With banks and housing finance companies starting to increase their marginal cost of funds-based lending rates, we look at the options available to home loan borrowers, to reduce the EMI burden
Public sector banks, such as the State Bank of India and private sector lender, ICICI Bank, have recently announced an increase in their marginal cost of funds-based lending rate (MCLR). Consequently, the interest rates for home loan borrowers is only likely to go up in the near future, as the interest rate cycle has bottomed out and is reversing. With prospects of more interest rate hikes in the offing, what should home loan borrowers should do?
Borrowers under the Prime Lending Rate and Base Rate regimes
Like home finance companies, banks also used to lend to borrowers at a rate, which was linked to their Prime Lending Rate (PLR). The lending was usually at that rate, or at a discount to the PLR. Since the PLR regime of interest rates was not transparent, the Reserve Bank of India (RBI) introduced the Base Rate system in July 2010. Under the PLR regime, the lender would lend at a rate, which was generally lower than the PLR and hence, the borrowers were not sure of whether they were getting the best rate or not. Under the base rate regime, the banks were not allowed to lend below their base rate and thus, the borrower would know what premium he was paying, over the rate charged to the best customer.
However, this also did not work well from the RBI’s viewpoint, as the banks were not reducing interest rates, in line with the reduction in repo rates announced by the RBI. So, the RBI mandated that all the new loans on or after April 1, 2016, will be linked to the MCLR. However, the RBI did not mandate migration of existing borrowers to the new MCLR system. So, some borrowers continue to pay higher interest rates on their home loan, under the PLR or Base Rate regimes. The difference is as high as two to three per cent, as compared to the MCLR. Ideally borrowers under the PLR and Base Rate regimes, should migrate to the MCLR regime, to avoid paying interest as high as 11 per cent. In case your lender is not willing to switch you to the MCLR regime, you can suggest that you will shift your home loan to another lender. In case your lender still does not yield, you may have to undergo the process of shifting your home loan to a new lender, which is a relatively tedious process but will help you get home loans under the MCLR and save a substantial amount.
[ecis2016.org] How are home loan rates charged by banks and housing finance companies
Borrowers under the MCLR regime
Borrowers who have taken home loans on or after April 1, 2016, or who had borrowed under the PLR or Base Rate regime and have already migrated to the MCLR regime, will see their rate of interest on home loans going up. The effective date for them will depend on the reset date as mentioned in their agreement, which is generally one year after the home loan is taken. So, unless the period of one year is over, they need not worry right now. As and when the MCLR change becomes effective for the borrowers, the lender will generally not increase the EMI but extend the tenure of the loan, unless the loan tenure extends beyond your retirement date, in case you are employed, or 65 years, in case of self-employed borrowers. However, some of the lenders may increase your EMI, even if the loan tenure does not extend beyond your retirement. So, a majority of the borrowers will not feel the pinch of interest rate hike immediately. However, as the interest rates have bottomed out and the interest rate cycle is reversing, you will see more rate hikes in future, which will necessitate increasing the amount of the EMI for home loan borrowers.
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Since the interest rate cycle is reversing, it makes sense for home loan borrowers to search for fixed rate home loans. Only a few lenders presently offer fixed rate home loans. So, the borrowers who can get their lenders to shift them to a fixed rate regime, should avail of the opportunity immediately, even if one has to pay some conversion charges, which are generally around one per cent of the home loan outstanding. You can even consider shifting to another lender, to avail of fixed rate home loans. Presently, no prepayment penalty is charged by home finance companies or banks, for borrowers under floating home loan regime.
So, borrowers, whose EMIs will go up and are not in a position to service the enhanced EMIs, have a few options to overcome the situation. In case the tenure of your home loan ends well before your retirement date, you can request your lender to extend your home loan tenure, so that the amount of the EMI remains the same. In case this is not feasible and you have some surplus funds available, you can pay part of the home loan and then, request the lender to reduce the enhanced EMI.
(The author is a taxation and home finance expert, with 35 years’ experience)
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