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Monday, February 3, 2020

Tips to Bring Down your Home Loan Interest Rate

Taking a home loan is more or less easy. Repaying it may not be so. Horror stories abound on how borrowers spend sleepless nights in the fear of missing an EMI. You have to be careful with your math every month. You have to set aside the equated monthly instalments (EMIs) payable to the bank or housing finance company. All other expenses become secondary.

So, what if we told you that you can bring down the home loan interest rate? Interested? In fact, it is not too difficult. You only have to be a little smart and make informed decisions.

Gain from the Low Interest Regime

A lot has changed in the home loan space in the last two months. Banks are offering lower interest rates for fresh borrowings. Last month, the Reserve Bank of India (RBI) cut the repo rate by 0.25%. It has now come down to 6.25%. The repo rate is the one banks pay to the RBI for borrowing funds. This has prompted banks to lower the interest rates on new home loans. Existing home loan borrowers can also benefit from this low-interest regime by taking a few smart steps.

Home Loan Balance Transfer or Refinance Options

Are you paying a higher interest rate than what your lender’s competitors are charging? You may foreclose the loan and transfer it to a new lender. Many banks are running campaigns with promises of no processing fees for transferred loans. If the difference in interest rates is high, it is better to do so. There will not be any foreclosure charges in certain cases: First, if the loan is on a floating interest rate basis. Second, if the housing loan is on a fixed interest rate basis but foreclosed from your own sources. However, this could be a lengthy and costly process. It is like applying for the new loan. Various fees of the new lender can add up to 50 basis points of the loan amount. Add to this the mortgage fee and taxes.

One-time Switch to MCLR

You can switch from a base rate to a marginal-cost-of-funds-based lending rate (MCLR). The MCLR is directly linked to the repo rate. The change in interest rates will be faster. In a lower interest regime, shifting to MCLR is better. A downward change in the repo rate will lead to a lower MCLR. Similarly, if the rates go up, the increase will return to haunt the borrower. If a bank is the lender, it will charge a conversion fee of around 0.5 per cent on the outstanding loan amount, plus taxes. Remember, this is a one-time change you can make. You cannot switch back to the base rate from here.

Reset the Loan from the NBFC or Housing Finance Companies

If your loan is from an NBFC (non-banking finance company) or a housing finance company, the MCLR system will not apply. In that case, you can reset your interest rate by paying a conversion fee. These companies do not change the base rate. They change the spread. That results in an overall reduced rate.

You will then have the option of maintaining the same EMI or lowering the loan tenure.

 Cost-benefit Analysis

Calculate the total cost you have to bear to reduce your interest rate, and how much you are saving. If the fees are high and the savings not so, it would make little sense to switch or reset the loan. A thumb rule to shift or reset your existing loan could be a minimum difference of 25 basis points.

So, you can make certain tweaks to your existing home loan to save on the interest. But there are a few things to consider. For instance, is your existing loan nearing completion? The impact of a rate change may not be high then. So, you can consider a switch or refinance only if your existing loan is around three years old.

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