TAKE THAT EMI LOAD OFF YOUR BACK
How to renegotiate the interest rate on your home loan
If you have bought a house on borrowed money, EMIs, or equated monthly instalments, are likely to be the deepest cuts in your monthly budget.
EMI amounts, in turn, are a function of interest rates. Most banks are currently offering new borrowers home loans at an interest of 8.35-8.5 per cent. The rate, however, may be higher for existing borrowers, especially for those who had borrowed before April 1, 2016. On this date, the RBI had introduced a new benchmark for lending called the MCLR, or a rate based on the marginal cost of funds, which allows banks to set different benchmark rates based on the loan tenure. This replaced the earlier base rate method, which was a single benchmark rate. The new benchmark was intended as a more accurate reflection of the repo rate, allowing periodic resets as well as varying spread over the base rate, to introduce more efficiency and transparency in the transmission of monetary policy. NBFCs (non-banking finance companies) and housing finance companies (HFCs), on the other hand, continue to offer home loans at the prime lending rate, where the benchmark rate is determined by the creditworthiness of the borrower.
According to the latest RBI report, despite the fact that the central bank has cut the repo rate by two percentage points since December 2014, the weighted average lending rates across banks have declined by only 1.25 percentage points, and 50 basis points after demonetisation. Thus, rate reduction by banks has not been in line with the overall decline in interest rates. Be that as it may, if you are an existing borrower, there are a few ways to reduce the interest burden on your loan.
Switching to MCLR
The RBI has allowed existing home loan borrowers to switch to the MCLR method. However, banks charge a fee of up to 0.5 per cent plus tax of the outstanding amount for such conversion. But given that MCLR is a more transparent method, switching to the same can be rewarding for the borrower in the long run. So, if a borrower has a home loan outstanding of Rs 50 lakh for 20 years and if the current rate of interest is 9 per cent, then the conversion fee will be Rs 25,000. But at a revised interest rate of 8.5 per cent, the saving on account of interest will be Rs 9.3 lakh.
Transferring home loan balance
You can transfer the remaining home loan to another lender who is offering a lower rate of interest. The new lender will pay the existing lender the unpaid home loan amount and your EMIs start with the new lender.
Negotiating with the lender
Before opting for a transfer of the remainder of the home loan, you can consider negotiating with your existing lender to lower the rate of interest. Most lenders will agree when you tell them that you are planning to move to another lender for the remaining loan. You might, however, have to pay a conversion fee.
Whichever option you might go for eventually, it always makes sense to do a cost-benefit analysis first. Factor in both the conversion fee as well as the paperwork involved. Generally, going for these options makes better sense in the initial years of your loan. Refer to the accompanying table, and see why.