Make The Most of The Lower Housing Interest Rates

The New Year kicked off on a happy note for home loan borrowers with State Bank of India slashing its lending rate. The bank has cut the marginal cost of funds based lending rate (MCLR) by 0.9% from 8.90% to 8%. As more lenders are likely to follow the suit, here is a quick recapitulation for borrowers who want to make the most of the lower housing interest rates. 

Loans with Banks - Post April 1, 2016, Banks have been asked by the Reserve Bank of India to change from base rate to MCLR. This means that all the new floating rate bank loans disbursed after March 31, 2016, are automatically covered under MCLR. Those who have taken loan before this deadline have the option to either switch to MCLR or continue with the base rate. Since MCLR is a more transparent rating system, therefore, it is advisable to switch to the same. 

Loans with NBFCs or HFCs -MCLR is not applicable for Non-banking financial companies (NBFCs) and Housing Finance Companies (HFCs). These lenders follow a static Retail Prime Lending Rate or base rate and a variable spread to fix applicable interest rate. Home loan borrowers can convert to lower housing interest rates by paying a conversion fee that varies across lenders. On the higher end, the fee can go up to 1% of the outstanding principal amount. 

Cost vs Savings - Before executing the switch or conversion, analyse the costs against savings that you make from reduced interest rate. If the conversion fee is higher than the overall savings on interest outgo then it makes little sense to switch. At the same time, if you are in the final years of repaying your home loan then switching to will negligible impact. This is due to the fact that significant part of interest rate stands paid within the initial loan tenure. 

Here’s a table to illustrate optimal scenarios when switching to lower rates makes sense.  

Home Loan Amount	Existing Interest Rate	Current EMI	New Interest Rate	New EMI	Yearly Savings	Conversion Fee	Case For Switch
30 Lakh	10%	₹ 28,950	9.10%	₹ 27,185	₹ 21,180	₹ 15000	Yes
30 Lakh	9.75%	₹ 28,455	9.10%	₹ 27,185	₹ 15,240	₹ 15000	No
30 Lakh	9.50%	₹ 27,963	9.10%	₹ 27,185	₹ 9,336	₹ 15000	No
30 Lakh	9%	₹ 27,476	9.10%	₹ 27,185	₹ 3,492	₹ 15000	No

Home Loan Balance Transfer - Inconclusive negotiations with existing lenders can be fixed by balance transferring the loan to the new lender. However, the process will be mean starting fresh right from the beginning. Also, this option is best suited for loans that have a residual tenure of 8-10 years. Again analysis of cost vis-a-vis savings needs to be taken care. There has to be a significant gap like 75bps or more to consider this option. 

Home loan accounts for the biggest monthly expenditure of Indian households. A systematic adoption of the above-mentioned steps along with planned prepayments can help you speed up the debt repayment process.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.

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