The Reserve Bank of India or the RBI as it is most commonly known is required to take various fiscal measures for the benefit of the economy as a whole. Not surprisingly, it increased the repo rate twice in the year 2018, both times by 25 basis points (bps) each, taking it to a high of 6.50 points in total.
This rise in repurchase rate, or repo rate implies an increase in the Marginal Cost of Funds Based Lending Rate (MCLR), thereby accounting for a subsequent surge in Home Loan Interest Rates. However, as a borrower, you must understand that your loan depends on numerous other factors of significance and that the change in repo rate alone should not determine your decision of opting for a Home Loan.
Before we jump on to the factors that you should place prime importance on, let us first take a quick look at what does this increase in MCLR mean for you.
In spite of the steep rise of 50 bps by the RBI, the State Bank of India, which is arguably the largest lending institution of the nation, has only raised its rates by 30 bps. To understand the impact of this hike, let us take an example. For instance, you have opted for a Home Loan amounting to 10 Lakhs, for 10 years, at an interest rate of 9.50%. With an increase in the rate by 30 bps, you will now be servicing the loan at 9.80%. Your equated monthly instalment (EMI) will increase from 12,940 a month, to 13,105 a month, resulting in a difference of 165 a month, or 1,980 over an entire year. Needless to say, the difference is rather trivial.
Now that you are aware of the fact that the RBI’s policy changes have little impact on the overall interest outgo, it is time for you to know and understand the factors which genuinely affect your borrowing. These include:
As is the case with any other product, you ought to shop around while buying insurance as well. After all, it is a substantial financial commitment, and the better rates you can find, the easier it will be for you to repay the credit.
In India, Home Loan interest rates usually vary from 8.50% to about 12.05% (as per prevailing market rates). However, if you seek a loan from small finance banks, you may end up paying anywhere between 12.50% and 15.65% as the interest rate.
It is best to look for a loan with as low an interest rate as possible. To do so, you may approach public sector banks, which are known for offering cheaper loans.
Moreover, you can shop around during festive seasons such as Diwali, when most lenders come up with exciting offers such as discounted rates, or waiver on different charges such as prepayment penalty or processing fee amongst others.
MCLR is essentially the rate below which a bank cannot lend a loan. The RBI governs this rate. While only a select few banks offer loans at this rate, most banks usually provide loans on a markup which ranges from 0.25% to 0,50%. This markup has a direct impact on the rate of interest that you pay, and hence, you should look for a lender that offers loans at little or preferably no markup on the MCLR. Of course, you will only be able to do so, if you enjoy a reasonably good credit history.
In case you have ample funds to do so, you are allowed to prepay a part of the outstanding loan amount. This, however, attracts a penalty known as the prepayment charge.
Most banks do not levy any fee, if the prepayment is made after the first 12 months of loan repayment and if the sum paid is less than 25% of the outstanding principal amount, in case of fixed rate loans.
Then again, no prepayment penalty is levied on prepayment in part or in full, in case of floating rate loans. However, it is best that you go through the terms of prepayment before signing the loan agreement, as it will give you an upper hand when you wish to close your loan earlier than stipulated in order to minimise your interest outgo.
As discussed earlier, repo rates often keep fluctuating and so does the MCLR thus resulting in a change in the interest rate levied on Home Loans.
If you believe that you are paying a higher percentage of interest than you should be, you can use the Home Loan Balance Transfer facility and shift your loan from your existing lender to a new lender, who can readily offer you the same loan at a cheaper interest rate.
Of course, you will be required to pay specific charges for this service, but if it helps you in saving a significant amount of money in the long run, it can be truly worth your effort and time.
Since this is an outstanding facility, you should always check with your bank, whether you can avail it or not, and what are the underlying terms and conditions for the same.
We hope that you now have a fair idea of the factors that deserve your due diligence when you wish to opt for a loan. While the policy changes brought into effect by the RBI may have some impact on your decision, your final call should be based on the host of the other relevant factors, which usually have a more significant impact on the financial commitment that you make.
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