Switching to MCLR based home loan will prove to be beneficial for borrowers after several banks have slashed down lending rates. However, it is a thoughtful consideration and you must take care of certain aspects before going in for switching your home loan.
With the end of the demonetisation saga on 30th of Dec 2016, the year 2017 appeared as a fresh bloom for the home loan borrowers. Several banks have announced cuts on their lending rates for home loans. The State Bank of India (SBI) lowered its home loan rate from 9.10 % to 8.60 %. ICICI Bank and HDFC banks have brought down to 8.65 % and 8.7 % respectively, while the bank of Baroda (BoB) has achieved the lowest interest rate of 8.35 %. While the lending rate slash is seen as a good step and will encourage property selling, many buyers are thinking over to switch their home loans after the rate cuts. Let us have an insight the overall aspect of this loan switching – who should switch and who should not.
Noteworthy that banks decide lending rate on home loan based on their MCLR – The Marginal Cost of funds based Lending Rate. After demonetisation, MCLR for all banks has been so optimised that they are able to slash the lending rates; however, there is seemingly more room to cut home loan by the banks.
Borrowers on Base Rate: Should switch
Old borrowers those who are paying EMI based on an erstwhile base rate system of lending should consider switching their home loans to a MCLR-based lending. This is irrespective of the fact that bank’s base rate has not come down significantly, switching to the current MCLR-based loan will benefit them. This is because the difference between the base rate at which old borrowers are paying is marginally high than the current MCLR based calculation. Even, the differential of 1 to 1.25% of rate cut will benefit them a lot. Borrowers who have availed home loan between July 1, 2010 and April 1, 2016 should consider switching their home loan.
For MCLR based Borrowers: Should hold
New borrowers, who have availed loan after April, 2016, there will not be significant gain from the rate cuts. This is because the banks will reset the interest rate after 12 months only. Therefore, any recent revision by RBI will not affect the EMSs for MCLR based borrowers.
What Base rate –based borrowers can do?
As a matter of practice, when the rate of interest on home loan goes down, banks automatically reduce the tenure, thereby restringing in an early closure of loan. In the current scenario, base arte borrowers have two options with them.
- Switch to MCLR based lending within their own bank
- Transfer their loan – Get their loan refinanced from another bank on the basis of MCLR mode.
However, it is noteworthy that if the loan is nearing to a closure, the borrower may continue the loan on base rate.
The Reserve Bank of India also has made it clear to the banks to allow the borrowers to switch to MCLR based lending.
How to switch from base rate to MCLR within the same Bank
If you are planning to switch from base rate system to MCLR based lending, you must check the marginal difference between what is being paid now and what the bank is going to offer as MCLR. In addition, the tenure of the loan should also be considered.
Refinancing – Switching to MCLR with another Bank
If you are paying at a higher rate of interest, you should consider refinancing the loan from a bank offering a lower interest rate. However, there will be a processing fee involved in this process. Your bank will not charge foreclosure fee or full repayment charges. Other regular charges applicable are lawyer’s fees and mortgage charges, etc. The bank may also ask you for a non-compulsory home loan insurance cover plan