During the coronavirus-led pandemic, when a large number of people are facing economic hardships, any good news is a precious commodity. Fall in interest rates offers a much needed respite to borrowers, especially home loan borrowers. On one hand economic challenges are troubling them, on the other they are sitting on a huge outstanding debt with long years of repayment left. In such a scenario, even a marginal drop in interest rate results in lakhs of savings during the entire tenure of the loan. However, not all home loan borrowers get the benefit - simultaneously and equally. The reduction benefit depends upon the kind of interest rate regime the home loan is into.
Interest rate transmission
Reduction of repo rate by the Reserve Bank of India (RBI) sets the direction of the interest rate for the borrowers. "The repo rate, which was 6.50 (per cent) at the start of 2019, has now come down to 4 per cent, a reduction by 250 basis points in a little more than a year," says Rishi Mehra, CEO, Wishfin.com. However, not all borrowers have so far received the complete benefit. They can expect the reduction happening in their floating rate home loans in near future. While some borrowers get it quickly, others have to wait longer depending upon the tenure and regime of their loan.
Repo linked loans to get immediate benefit
Most banks have chosen the repo rate as their benchmark after RBI made external benchmarking mandatory to increase transparency in interest rate that the lenders charge. So, whenever there is any change in the repo rate, borrowers are equally impacted. "Borrowers servicing home loans under the repo-linked lending rate benchmark will get maximum benefits of such rate cuts," adds Mehra.
If a home loan is linked to the repo rate, the borrower would get the quickest benefit of this reduction and up to maximum extent. "Maybe from June 1, 2020, banks will start slashing the repo-linked home loan rate further following the latest 40 basis point reduction," says Mehra of Wishfin.com.
Not the entire benefit will reach borrowers
State Bank of India (SBI) recently decided to increase the risk premium, anticipating lockdown related stress on earnings of many borrowers. When it passed on the last rate cut benefit to borrowers, it also increased the risk premium by up to 20 per cent basis points. One basis point is equivalent to 0.01 per cent. As a result, many borrowers received the reduction benefit of only 0.55 per cent instead of 0.75 per cent. Many other lenders are expected to follow suit.
MCLR customers will have to wait longer
Many borrowers are still servicing their home loan equated monthly installment (EMI) under the old marginal cost of fund based lending rate (MCLR) regime. They will have to wait a little longer before their EMIs fall. "The transmission of reduced repo rate to MCLR-linked home loans will be slower as the repo rate is not the sole factor determining MCLR. Banks also need to factor in their cost of deposits while determining MCLR. As a large portion of the existing bank FDs were opened at much higher interest rates, banks will continue to incur higher interest costs on those FDs till their maturity or renewal," says Ratan Chaudhary, Head of Home Loans, Paisabazaar.com. "Moreover, the transmission of reduced policy rate will also depend on the next interest rate reset date of the MCLR-linked home loan borrowers. These borrowers will continue to repay their existing home loan interest rates till the next reset date of their home loan interest," he adds.
What should you do if the loan is under MCLR?
When interest rates fall, it results in direct savings for borrowers if they opt for reduced EMIs. However, if they stick to existing EMIs, their loan gets repaid faster. The longer it takes for a customer to avail the low interest rate, greater will be the delay in paying off the home loan.
It is the time you make a switch to a new interest rate regime. "Many banks provide the option for home loan borrowers to switch to a repo rate linked loan. The borrowers can approach the bank and apply for a rate switch to reduce their effective interest rate. Banks generally charge conversion fees in such cases. While making the switch, borrowers can opt for a change in the monthly installment amount or in loan tenor," says Gaurav Pawra, National Sales Head, Clix Housing Finance. "For those borrowers, where such an option is not offered by their Bank, they can opt for transfer of loan to a new lender (bank/ NBFC) after evaluating the cost benefit," he adds.
In case a borrower is facing difficulty with the current lender in switching over to a lower rate, he should consider shifting the loan to a new lender. "They should also compare interest rates offered by other banks on exercising home loan balance transfer options. Borrowers must opt for home loan balance transfer if the rates offered by other banks are significantly lower resulting in substantial savings. The transferred loan will be treated as a fresh loan by the lender and hence, will be linked to repo rate or other external benchmark regimes," suggests Chaudhary of Paisabazaar.com
Base rate borrowers to get the benefit last
If the home loan is still under base rate regime, the customer may get the benefit of this fall quite late. It is the time for him to make the switch to repo linked loans. "If you are servicing home loans under base rate or MCLR, look for a switch over to the repo-linked rate of the bank where your loan is getting serviced. The bank will charge a switchover fee, which could be around INR 5,000-10,000, plus 18 per cent Goods and Services Tax (GST)," suggests Mehra of Wishfin.com. "However, if the repo-linked home loan rate of your bank is still above the average market rate, you have the option to switch your outstanding loan balance to another bank at a lower rate. This will help reduce the Equated Monthly Installment (EMI) and interest outgo on a home loan," he adds.
Loans with NBFCs or HFCs
Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) are not covered under the RBI's mandate to offer external benchmark linked loans. However, due to intense competition they also move their rates mostly in sync with the banks. At present, the lowest home loan rate of LIC Housing Finance Limited (HFL) and HDFC Limited is 7.40 per cent and 7.50 per cent, respectively. However, the lowest rate may come with some conditions.
"LIC has kept a condition wherein the borrowers have to assign new or existing single premium term insurance policy with sum assured equal to the loan amount so that they can get the opportunity to service the home loan at 7.40per cent. Whereas, HDFC offers home loans at 7.50per cent to those borrowers who have a credit score of 800 and above. On the other hand, the maximum rate at these two is well below 9per cent. While the maximum rate of HDFC is 8.65per cent, the same for LIC HFL is 8.85per cent," says Mehra.
However, there are many NBFCs and HFCs that are charging higher interest rates to old borrowers. If you happen to be one such borrower you should start exploring options to reduce your interest cost.
"In case the NBFC, where your home loan is running, charges a greater rate of interest, you should look to shift your outstanding balance to a bank at a lower rate. The bank will check your credit score and undertake a legal and technical evaluation of the property. If your score is good and the property verification process is completed successfully, you will get the balance transfer at a lower rate and save on the interest outgo over time," says Mehra.