Homebuyers have reasons to cheer as the home loan rates have been falling. In the past year, home loan rates have fallen between 1-1.5 per cent across borrowers. With the competition between lenders becoming aggressive and new players entering the fray, many lenders cut rates in May 2017 despite the fact that the RBI has held on to the current repo rate of 6.25 per cent for the past few months. “With limited threat to persisting low inflation visible in the coming few quarters, we may see the RBI reducing rates over the next 2-3 policy meets, although the precise quantum and timing will depend upon incoming data prints. If this happens, we could see a potential reduction of a further 25-50 bps in home loan rates over the next twelve months,” says Harsh Gahlaut, Chief Executive Officer, FinEdge, a financial advisory firm. “With the interest rates lowest in more than a decade, it is the best time to opt for a home loan,” says Adhil Shetty, CEO, BankBazaar.
When going for a home loan it is important to understand MCLR or Marginal Cost of Funds Based lending. Till 2016, banks used to lend on the basis of PLR (Prime Lending Rate), but now they’re mandated to peg their lending rates to their MCLR. “MCLR loans work similar to the base rate. The key difference in calculations is that MCLR takes into account the “Marginal Cost of funds,” which takes into account the cost of borrowings depending on the repo rate; the interest rates offered on deposits; and the returns on net worth,” says Shetty. Due to this, it is a great deal more responsive to changes to the repo rate. In addition, there is a tenor premium to offset the risk associated with lending for a longer time. “One point to keep in mind about MCLR is that they come with a reset period for the interest rate. Regardless of the interest fluctuations, the interest would be reset only at the end of the reset period. Different banks offer different reset periods. The rate of interest may also vary according to this,” he adds.
The right choice
This is where a borrower needs to make a choice. “MCLR is recomputed by banks on a monthly basis, but they are passed through to your loan on an annual or bi-annual basis, depending upon your choice. To that effect, your home loan will act as a “fixed rate” loan for either 6 or 12 months, depending upon which option you select. In scenarios such as the present one where a further fall in rates is foreseen, there’s a case for shortening the reset period on your MCLR linked loan,” says Gahlaut. However, he adds that each lender will have its own clauses and terms. For instance, some banks allow 6 months resets for loans only up to a specified amount (for example, 30 lakhs) or specific tenors. Having said that, there’s a lack of clarity on whether reset periods can be changed during the course of the loan – if not, those opting for shorter reset periods may find themselves losing out in rising interest rate scenarios, which are bound to come about at least once during a 20-year loan period. “So borrowers need to gain clarity on specific clauses related to resets before they finally zero in on a lender,” he says.
Finally, there are a few things a borrower should always keep in mind irrespective of the kind of loan. Says Shetty: “Always take time to do your due diligence before you apply for any loan. Factor in all the expenses and then, based on the suitability and your eligibility, choose a lender to apply. Don’t apply to several lenders for different or the same loan at the same time. This makes it seem that you are credit hungry, which can affect your credit score and bring down the chances of your application being approved.”