- Have you taken a home loan before October 1, 2019? Its interest rate has come down recently!
- But is it the lowest available in the market? Let’s find out here!
If you have taken a home loan before 1st October 2019, your interest rate must have changed recently. Many banks have cut the interest rate for such customers. Even then, is your Home Loan Interest Rate the lowest? Even if your interest rate is higher than the average market rate by 0.25-0.75%, you could end up paying INR 2-3 lakh or more.
But you can correct things and reduce your home loan burden. You need to check the average market rate, compare it with yours and take steps accordingly. In this post, we will do such an introspection for you and suggest some swift changes if needed. Let’s get started!
Your Home Loan Interest Rate Could be More Than the Average Market Rate Despite Reduction!
Assuming you have not made any structural changes to your interest rate for a home loan which you took before October 1, 2019, we reckon you are in the Marginal Cost of Lending Rate (MCLR) regime where interest rates have come down recently.
For example, ICICI Bank had cut the 1-year MCLR by 10 basis points (100 basis points = 1%) to 7.45% on August 1, 2020. Bank of Baroda and Canara Bank cut the 1-year MCLR to 7.45% and 7.35%, respectively, a few days ago. Similarly, other banks have also cut their respective 1-year MCLR, which banks use to set home loan interest rates.
So, the average 1-year MCLR for banks could be around 7.45%. But that is not the eventual rate for you! There will be some additions of some 20-80 basis points to it. If we add that, the rate would come as 7.65-8.25% per annum.
In comparison, borrowers who took a home loan after 1st October 2019 are the same at the Repo-linked Lending Rate (RLLR). So whenever the Reserve Bank of India (RBI) changes the Repo Rate, the rate at which the central bank lends to commercial banks, your home loan interest rate will change in that proportion.
This is where the MCLR, base rate and other benchmarks could not change in proportion to the Repo Rate cuts made by the RBI over the last 5 years. The RLLR of most banks has come below 7%, with the eventual rate being 6.85-7.80% on average.
So, the average difference between the MCLR and RLLR-based home loan interest rate is around 0.60%. Such a difference could increase your home loan obligations substantially.
Let’s Check the Difference of Cost for MCLR and RLLR-based Home Loans
Presently, the difference between the MCLR and RLLR-based Home Loan is around 0.60%. Let’s figure out the difference on a INR 50 lakh loan where the RLLR interest rate is 7.20% and the MCLR-based rate is 7.80%. The table below shows the cost of the two over 20 years. Take a look.
|Home Loan Interest Rate Benchmark||EMI (In INR)||Interest Outgo (In INR)|
So, with the MCLR, you could pay around INR 4,40,240 (48,88,432-44,48,192) more than the borrowers who are paying the home loan at an RLLR-based interest rate. Also, the MCLR-based home loan interest rate changes once in a year, irrespective of the changes made in between. So, if you booked a home loan on 1st January 2019 at MCLR, the interest rate will reset a year later. It doesn’t matter how many times the bank must have changed the MCLR during this period.
This is much unlike RLLR-based home loans where the interest rate changes whenever the Repo Rate changes. Further, the spread over the RLLR will remain the same throughout the loan tenure unless the credit profile changes significantly.
So What to Do to Negate the Effect of Higher Home Loan Interest Rate?
A conversion to the RLLR-based home loan interest rate will save much of your interest outgo. However, you will need to pay either a flat sum or a certain percentage of the outstanding loan balance towards conversion. Let’s check the table below to know the conversion charges of different banks.
|State Bank of India (SBI)||INR 5,000|
|ICICI Bank||If prepayment charges are not applicable, INR 1,000 will be debited|
If prepayment charges are applicable, the bank will levy a charge at 0.50% of the principal outstanding
|Punjab National Bank (PNB)||As Applicable|
|Bank of Baroda||INR 2,000|
|Axis Bank||0.50% on the drawing power, subject to a minimum of INR 10,000|
|Kotak Mahindra Bank||As Applicable|
Note – The conversion fee will also include the applicable Goods and Services Tax (GST), which presently stands at 18%.
Shall You Go for a Balance Transfer to Ease Your Home Loan Interest Rate?
If the RLLR-based home loan interest rate of your bank is quite higher than the rate available at other lenders, you could think of doing a balance transfer. It helps borrowers transfer their home loan balance to another lender at a lower interest rate. This could also reduce your interest outgo over time. Check out below the home loan balance transfer interest rates of different lenders.
|Lenders||Interest Rate (In Per Annum)|
|State Bank of India (SBI)||6.65%-7.15%|
|HDFC Limited||7.00% - 8.10%|
|LIC Housing Finance (LIC HFL)||6.95% - 8.15%|
|PNB Housing Finance (PNBHFL)||6.99% - 9.65%|
|Bank of Baroda||6.75% - 8.25%|