Why Your Home Loan EMI Is Still High

Several lenders have cut lending rates. But is your Home Loan EMI still the same? Find out why and what you can do.The newspapers are screaming that banks and other lenders have reduced their lending rates. This includes rates for your Car Loan, Personal Loan and Home Loan. But, when you look at your Home Loan EMI, it’s still the same.

What happened? Is this happening only to you or are other borrowers experiencing this as well? Why has your lender not provided you with a lower interest rate? Can you do anything about it? We answer these questions and more, just for you.

Rates Are Yet To Come Down

Unfortunately, not many know that the rate cuts announced by lenders apply only to new borrowers. Loans of many existing borrowers are based on the base rate system if their loans are with banks, or the Prime Lending Rate (PLR) system if with a Non-Banking Finance Company.

Remember, Marginal Cost Of Lending (MCLR) replaced the base rate for banks. So, loans taken out between 2010 and 2016 come under the base rate system or if you have taken a loan from a Non-Banking Financial Company (NBFC), you will come under PLR. Lenders have not been very proactive in passing on lower rates to borrowers under the PLR system. This means that these borrowers are still grappling with interest rates of 9% or more.

But, how are other borrowers able to get lower interest rates?

Well, they may be on MCLR loans. Banks pass on rate cuts quickly to MCLR loan borrowers as compared to the base rate or PLR borrowers. So, this is one reason for your Home Loan EMI still remaining high.

Additional Reading: What Is Marginal Cost Of Funds Based Lending Rate?

Do you have an MCLR Home Loan but your EMIs are still high?

For MCLR, reset dates vary from bank to bank. So, your bank might not have reduced the MCLR.

What is an MCLR reset date?

The date on which the MCLR will be reset to reflect the present interest rates is the reset date. Some banks reset MCLR once a year, while there are others that reset them once a quarter. So, if your bank has not reset its MCLR, you might have to wait to eventually enjoy lower rates.

Your lender’s MCLR rate has been reset but your loan rate is still high?

Check whether you have a floating rate Home Loan. Only with a floating rate Home Loan, can you enjoy lower rates when interest rates are cut. If it is a fixed-rate Home Loan, you need to pay the same interest rate throughout the tenure.

There are some Home Loans where the rate is fixed for an initial period (like 3 or 5 years). After this period, the loan automatically becomes a floating rate one. Check the terms of your Home Loan for more details.

Another reason why your EMI might be still high is that your lender might need you to place a request for new rates. Most lenders have a clause in their terms stating that the customer has to place a request if they want to enjoy lower interest rates. This, of course, doesn’t apply when the rates are going up.

Additional Reading: MCLR Linked Loans – More Affordable Loans For You

So, if you find that your lender has cut lending rates, but you are still on old rates, ask your lender to switch your Home Loan to the new rates. Depending on the lender, you may need to pay some fees for the switch. However, most times it is just a one-time fee.

Still servicing a high Home Loan EMI? Here’s what you can do.

Consider switching to an MCLR loan. Even though MCLR loans might not be pure floating rate loans, they will be reset more often than PLR loans. You can enjoy lower interest rates on MCLR loans as soon as the MCLR is reset on the reset date. On the MCLR reset date, the interest rates prevailing on that particular date will be taken into consideration. Also, as soon as the Reserve Bank of India (RBI) changes interest rates, MCLR will be impacted. Good news isn’t it?

The best way forward would be to choose lenders with the shortest MCLR reset dates. When you switch lenders, you might need to pay conversion fees. This is for conversion from a base rate to an MCLR rate.

Additional Reading: How Do Interest Rates Affect Inflation?

Is it possible to get a conversion fee waiver? Yes! Some lenders waive the conversion fee when you choose to switch at PLR and agree to convert to MCLR when it is reset the next time. Note that this conversion fee is largely negotiable. So, sharpen your bargaining skills.

Additional Reading: Loan Conversion – An Option For Existing Borrowers

Choosing another lender?

Switching to another lender is a good idea. But you need to do a cost-benefit analysis before making the switch. This will tell you whether it makes sense to actually switch to a new lender. You can calculate the cost of the loan transfer and the new EMI to find out whether it is worth it.

Loan costs include processing fees, stamp duty charges, legal fees, and valuation fees, among others. How much could these fees amount to? Experts estimate that this could be as much as 5% of your present loan amount. So, caution is essential.

Adhil Shetty, CEO, Bankbazaar.com, says, “You need to calculate the effective interest rate and also understand how much reduction you will finally end up with if you transfer your loan to another bank. You also need to make sure that you compare the benefits of the lower interest rates offered by the new bank only after deduction of all loan processing costs and any hidden charges. So, choose wisely when you want to transfer your Home Loan.”

If you are still looking for a Home Loan, then this might be the time to go for one.

Consider this: State Bank of India says they have got 3 times more Home Loan enquiries after their lending rate was cut. Convinced? Go ahead and get that Home Loan. But don’t forget to compare across lenders before zeroing in on the right one for you.