How existing borrowers can reduce their home loan interest rates

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Lenders are aggressively reducing interest rates on new home loans. But what if you are an existing borrower? Those who have taken home loans before April 2016 are still paying a higher interest as their loans are either Base Rate-Linked or Benchmark/Retail Prime Lending rate (B/RPLR)linked. The options before you are as follows.

If bank is the lender
One-time switch to MCLR: You can switch from a base rate to MCLR or marginal cost-of funds based lending rate. The latter is more dynamic as it is directly linked to repo rate and allows you to enjoy the change in interest rates faster. “In the current cycle of lower interest rates, it makes sense to shift to MCLR as a downward change in repo rate will lead to lower MCLR,” says Anil Sachidanand, MD & CEO, Aspire Home Finance.

There is also a cost involved. Banks charge a conversion fee of around 0.5% on your outstanding loan amount, plus taxes. For instance, if your home loan outstanding is Rs 20 lakh, the conversion fee would be around Rs 10,000, plus taxes. Most importantly, switching to MCLR is a one-time option, you cannot revert to base rate again. And once you choose an MCLR rate, you cannot reset it for the next one year.

If loan is with NBFCs
Reset to a lower rate: The MCLR system doesn’t apply to Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs). So, if you have taken a loan from either, you can reset your interest rate by paying a conversion fee.

HFCs and NBFCs usually do not change the base or BPLR rate, they change the spread, which results in an overall reduced rate (actual interest rate = base rate +/- spread). For instance, a lender with a base rate of 16% and a spread of -6%, will allow you to change your spread to say -7%. This would result in a reduced rate of 9% [16% + (-7%)] than the earlier 10% [16% + (-6%)]. The conversion fee will vary from lender to lender. Also, unlike with banks, you can reset your interest rate any number of times.

Once you opt for a reduced interest rate either with banks or NBFCs, you have the option of maintaining the same EMI or lower the loan tenure and vice versa. In case you choose the option to lower the EMI, you would be required to provide new ECS mandate/post-dated cheques.

Cost-benefit analysis
Before taking the plunge, calculate the total cost you are incurring to reduce your interest rate, and the savings you are making in the process. If the fees are higher than the savings, it doesn’t make sense to switch or reset. Account for the total cost—conversion fee plus taxes. Look for at least 25 bps difference in interest rates.

Also, consider the remaining tenure of your loan. “When the balance tenure is only a few years, it is not advisable to switch/reset as the bulk of the interest component would have been paid and EMI would constitute mainly the principal,” suggests Rishi Mehra, Founder, Deal4Loans.

Next, check on the spread being offered by the lender. “Lenders can’t lend below MCLR or base rate, but if you have a good credit history and track record, you can negotiate on the spread,” says Mehra.

You also need to look at the charges. They vary from lender to lender and can be negotiated.

Refinance options
If the deal with your existing lender isn’t lucrative, you could consider refinance or balance transfer option. However, it is a lengthy process. It is like getting your loan approved all over again. Refinancing can be costly too. Various fees of the new lender can be up to 50 bps of the loan amount and then there is the mortgage fee plus taxes.

“If the processing and transaction fee is less than the savings on the interest rate difference (between existing and the new lender) for one year, it makes for a case to switch to a new lender,” says Devang Mody, President, Consumer Finance, Bajaj Finance. “If there is a minimum difference of 75 bps between the interest rate offered by a new lender compared to existing lender, refinancing makes sense. That too only for loans with residual tenure of more than 7-10 years,” says Sachidanand.

So the choice between refinancing, switching or resetting a loan rate depends on the outstanding amount and tenure, the difference in rates and the amount of time you have to get the job done. As interest rates may not remain low for ever, make the most of current low rates.

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