The year 2017 has begun on a good note for home loan borrowers, with significant cuts in interest rates being announced by most banks. Experts point out that the reduction in the interest rates, will serve as a catalyst to revive the real estate sector. However, the question is: Will all home buyers benefit, because of the fall in rates?
“If the existing borrowers have borrowed home loans at fixed interest cost, based on the base rate system and not the marginal cost of funds-based lending rate (MCLR) system, where the interest rate was around 10%, then, he will not benefit from the rate cut and will have to pay extra money as compared to new home buyers,” points out Ajay Jain, executive director – investment banking and head real estate group, at Centrum Capital.
“Even existing home buyers, who have availed of loans under the MCLR regime, will have to wait till the reset date, to reap the benefits. This reset date differs from one bank to another and varies from three months to one year. This means, the borrower will have to pay the higher interest cost till the next reset date,” adds Jain.
However, new borrowers will benefit and they will also be eligible for a higher loan amount, as the EMI is generally linked to the monthly income.
Will the interest rate cuts benefit existing borrowers or new borrowers?
“A borrower who has taken a loan under the MCLR scheme after April 2016, would have to wait until the reset period, before their interest rates are recalculated. Those who have older loans, may still be on the base rate regime, whose interest rates have either not been changed or changed only marginally. Borrowers stand to spend more on the loan, in either case,” points out Adhil Shetty, CEO, BankBazaar.com.
“However, in the former, the excess amount paid, would be only for a few months, until the reset. After this, the borrower would be able to avail of the lowered interest rates and the difference will not be more than a couple of thousands. In the latter case, the difference would be significant,” he says.
Shetty elaborates with the example of a home loan for Rs 50 lakhs, at an interest of 9.2% for a period of 25 years. “Your current EMI would be Rs 42,646 and the total amount that you pay back, would be approximately Rs 1.02 crores. If your interest rate drops to 8.6%, your total repayment will reduce to approximately Rs 98 lakhs.
You will end up saving more than Rs 4 lakhs, on your interest over the next 20 years of your loan,” suggests Shetty.
Should borrowers switch the home loan within same bank or to another bank?
Experts believe that if you have an older loan, it may be better to refinance the loan. For borrowers on the base rate system, this is the best time to renegotiate and switch your loan to the MCLR system, within the same bank.
It is always a good idea to speak to your existing bank first. If you have a good track record, your bank may be willing to negotiate, as they would not want to lose a reliable customer.
In case you are unable to reach an agreement, you can go ahead with other lenders.
“Stay, if the same bank is able to reset your MCLR and reduce the rate of interest on the existing home loan. Lenders charge a switching fee (which is typically a percentage of the loan outstanding), for conversion of the loan from one system to another. You need to compare your savings, with the switching fee that the bank is charging you. Additionally, the switching fee is paid upfront, while the cost savings are through lower EMIs every month. Hence, you may switch your home loan to any other bank, if there is a substantial saving in your EMI outflow,” concludes Ramratthinam S, CEO of Muthoot Homefin (India) Limited.