Since 2015, lending rates have been trending downwards. For the last six-odd months, however, the Reserve Bank of India has kept the repo rate unchanged. This signals a bottoming-out of loan interest rates. Even with the RBI staying put, banks have proactively reduced lending rates following demonetisation.
At the end of 2016, the State Bank of India led with a large cut on its one-year MCLR, slashing it by 90 basis points to 8.00. Recently, the SBI made another rate cut, this time to its base rate, reducing it to 9.10 by 15 basis points. Other banks and lending institutions too have slashed their rates.
What Does This Mean?
This means three things for the consumer.
One – this is still a great time to take a Home Loan, since the interest rates are at their lowest in recent times, and therefore you can take bigger loans or pay lower EMIs. This also needs to be viewed with the arrival of the Real Estate (Regulation & Development) Act (RERA), which aims to protect the interests of home buyers.
Two – if you already have a loan, now is a great time for you to make principal pre-payments and reduce your loan balance, therefore ensuring heavy long-term savings for yourself. This is because we’re seeing a bottoming out of interest rates, and they may start rising at some point in the near future.
Three – if you’re not happy with the interest rate you’re currently paying, this is also a good time for you to transfer to an MCLR-linked loan.
What Is An MCLR-Linked Loan?
Floating rate loan products issued since 1st April 2016 are tied to the marginal cost of lending rate. This is a departure from the base rate regime prevalent earlier, though loans taken before 1st April 2016 may still be tied to the base rate. MCLR is more responsive to RBI’s rate movements, allowing loan holders to receive rate cuts in a transparent, time-bound manner. Your MCLR-linked loan would automatically reset interest rates as per the fixed intervals (such as six months or a year) mentioned in your loan agreement.
How Can Your Transfer Your Loan?
Let’s say you’re not happy with the interest rate you’re paying. For example, you may be paying 9.5% while the rates in the market have come down to around 8.5%. You have the option of transferring your loan to an MCLR-linked loan. You can do this in two ways.
One – you transfer within your own bank or lending institution. This will involve minimal paperwork and a loan transfer charge.
Two – you can transfer to another bank or lending institution by going through a loan application process. This may involve a greater amount of paperwork and higher costs. Ascertain the transfer costs for both options and consider the long-term interest savings. You can work with your lender or use online EMI calculators to ascertain your interest savings.
How Much Can You Save By Transferring?
Let’s say you took a loan for Rs. 30 lakhs at 10% in January 2014 for 20 years. Your projected interest cost over 20 years was to be Rs. 39.48 lakhs. You paid 36 EMIs, during which your interest payments amount to Rs. 8.77 lakhs. Your loan balance at the end of three years was Rs. 28.34 lakhs.
Here, you decided to switch to a loan at an interest rate of 8.6% for the remaining 17 years. By switching to a cheaper loan, your interest payment over the remaining 17 years would fall to Rs. 25.68 lakhs. This saves you Rs. 5.03 lakhs over the original interest costs of Rs. 39.48 lakhs, minus the costs of loan transfer.
How Much Can I Save By Pre-Paying?
Pre-payment, while interest rates are low, can make a greater impact in terms of reducing your loan balance. Let’s take the same loan example we shared above. For the loan of Rs. 30 lakhs at 10% for 20 years, your loan balance after three years is Rs. 28.34 lakhs.
You pre-paid Rs. 1,00,000 with the 37th EMI. This reduces your total interest payment to Rs. 35.44 lakhs. This saves you Rs. 4.04 lakhs from the original payment plan.
But if you pre-paid on the same loan balance (Rs. 28.34 lakhs) when the interest rate had fallen to 8.6%, your total interest payment over 20 years would be Rs. 31.4 lakhs – savings of Rs. 8.08 lakhs.
It’s a good time to be a home buyer in India. With cheaper loans, the arrival of RERA and the general slowdown in realty, it’s possible for you to find your dream home at affordable prices.
(The writer is CEO, BankBazaar.com)