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Why it makes more sense to switch your home loan after this interest rate cut

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Why it makes more sense to switch your home loan after this interest rate cut

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  1. Why it makes more sense to switch your home loan after this interest rate cut

  2. The start of the new year may have something to cheer for the home loan borrowers. Several banks have significantly reduced the interest rates charged on these loans. The State Bank of India (SBI) has lowered its home loan rate from 9.10 per cent to 8.60 per cent and ICICI Bank from 9.10 percent to 8.65 percent, HDFC at 8.7 per cent, with other banks set to follow suit. Effectively, home loan rate has come down by an average of about 0.4-0.5 per cent after these announcements.  

  3. Noticeably, SBI's one-year MCLR is at 8 per cent which makes the spread on its home loan 0.6 per cent. So, even though the MCLR of banks have fallen, the actual home loans are not at MCLR. Still, the writing on the wall is clear - there is more room to cut home loan rates by the banks. Borrowers on base rate should switch nowIf not all then at least the old borrowers who have been servicing their EMI's based on the erstwhile base rate system of lending, .. 

  4. For those who had taken loans after July 1, 2010, but before April 1, 2016, the loans are linked to the bank's base rate. And for most of these borrowers, the home loan interest rate is around 10 per cent. After the recent rate cuts announced by banks, the average MCLR has fallen to about 8.75 percent or even lower. This differential of 1-1.25 percent in base rate and MCLR will help old borrowers to switch to MCLR and save on total interest outgo. 

  5. Why to switch nowThe primary reason to switch from base rate to MCLR has to be the sluggishness seen in banks' passing on the benefits of RBI rate cuts to borrowers. RBI's repo rate cuts were not reflecting in the bank's base rate but are a part of the factors that goes into calculating the bank's MCLR so, the moment repo rate changed, MCLR was impacted.  For more details to know about Housing Loan Interest Rates read further.Further, the MCLR takes into account the marginal cost of funds which includes the rate at which the .. 

  6. The base rate, on the other hand, has seen only marginal reduction since last 24 months. Post demonetisation, banks are expected to wait and see the impact once the restrictions on cash withdrawals are removed. If the funds don't move out from the banking system in significant amounts, further rate cut is expected.  For more details to know about Housing Loan Interest Ratesread further.MCLR based borrowersFor the new home loan borrowers who have taken loan after April 1, 2016, there's not much immediate benefit from the rec .. 

  7. WatchoutsIn a falling interest rate scenario, quarterly or half-yearly could be a better option, provided the bank agrees. But when the interest rate cycle turns, the borrower will be at a disadvantage. After moving to the MCLR system, there is always the risk of any upward movement of interest rates before you reach the reset period. If the RBI raises repo rates, MCLR too, will move up. Options for base rate borrowersWhen the interest rate on your loan goes down banks, on their own, typically reduce the tenure automatically (instead of reducing EMI amount) and thereby, transfer the benefit of lower rate to the customers. The base rate borrowers now have two options - switch to MCLR based lending with the same bank or else transfer i.e. get the loan refinanced from another bank on MCLR mode. One may also continue the loan on base rate,  .. 

  8. Switching from base rate to MCLR within the same bankIt makes sense to switch if the difference between what you are paying and what the bank is offering now as MCLR is significant. And also in cases where the time for the home loan to finish is not near. Switching loan from base rate to MCLR with another bank (refinancing)If your bank is offering a high home loan interest rate (MCLR plus spread) then look for refinancing. Get ..  Source:economictimes.indiatimes.com/wealth/borrow/switch-home-loan-on-base-rate-to-mclr-to-cut-interest-burden/articleshow/56326321.cms

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