What should Borrowers do When Banks Raise their MCLR Rates
Jun 13, 2018 Home Trading Steps
Recently, public sector banks like State Bank of India, ICICI have announced an increase in their marginal cost of funds-based lending rate (MCLR). As a result the home loan interest rates is like to increase in near future. In such situation what home loan borrowers should do?
Let’s look at the options available for home loan borrowers to reduce their burden of EMI.
Let’s look at the options available for home loan borrowers to reduce their burden of EMI.
Under the Prime Lending Rate and Base Rate regimes
Banks lend to borrowers at a certain rate that was linked to the Prime Lending Rate (PLR). The lending use to be usually at that rate or at a discount to the PLR. Under the PLR regime the lender would lend to the borrower generally at a lower rate than the PLR, therefore the borrowers were not sure whether they were getting the best rate or not. Thus, the PLR regime of inteterest rates was not transparent enough and the Reserve Bank of India (RBI) introduced Base Rate system in 2010 July. Under the base rate system, the banks were not allowed to lend below the base rate and the borrower would be clear about the premium he was paying over the rate charged.
But this also did not work well with RBI as the banks were not reducing the interest rates in line with the reduction of repo rates by the RBI. Hence, the RBI made it compulsory for all the new loan on or after April 1, 2016 to be linked with MCLR. Although, the RBI did not mandated the migration of existing borrowers to the new MCLR system. Due to which, some borrowers continues to pay higher interest rated for their home loan as per the PLR or Base Rate systems. The difference between the older systems and the new one is high as two to three percent. However, the borrowers under PLR and base rate regime should migrate to the new MCLR regime in order to avoid paying high interest rate like 11 percent.
If your lender is not willing to shift your loan under MCLR regime then you can tell that you would shift your home loan to some other lender. If still your lender do not shift you home loan then you can opt to shift you home loan to a new lender which is a tedious task but it would help you save a substantial amount under MCLR system.
But this also did not work well with RBI as the banks were not reducing the interest rates in line with the reduction of repo rates by the RBI. Hence, the RBI made it compulsory for all the new loan on or after April 1, 2016 to be linked with MCLR. Although, the RBI did not mandated the migration of existing borrowers to the new MCLR system. Due to which, some borrowers continues to pay higher interest rated for their home loan as per the PLR or Base Rate systems. The difference between the older systems and the new one is high as two to three percent. However, the borrowers under PLR and base rate regime should migrate to the new MCLR regime in order to avoid paying high interest rate like 11 percent.
If your lender is not willing to shift your loan under MCLR regime then you can tell that you would shift your home loan to some other lender. If still your lender do not shift you home loan then you can opt to shift you home loan to a new lender which is a tedious task but it would help you save a substantial amount under MCLR system.
Borrowers under the MCLR system
Those who have taken loan on or after April 2016 or under the PLR or Base Rate system and have already shifted to MCLR regime, they would see their interst rate getting increased. The effective date for them would be the rest date as mentioned in their agreement which is generally after one year of the home loan taken. When the MCLR regime becomes effective, the lender usually do not icrease the EMI but extend the loan tenure until the tenure goes beyond your retirement date, if you are employed, or 65 or a self-employed borrower. Some of the lender increase the EMI if the tenire of the loan does not get extended beyond your retirement. Therefore, a majority of the lenders do not feel the shock of the interest rate hike immediately.
However, as the interest rates have bottomed out and the interest rate cycle is reversing, you will see more rate hikes in future, which will necessitate increasing the amount of the EMI for home loan borrowers.
Since the interest rate cycle is reversing, it makes sense for home loan borrowers to search for fixed rate home loans. Only a few lenders presently offer fixed rate home loans. So, the borrowers who can get their lenders to shift them to a fixed rate regime, should avail of the opportunity immediately, even if one has to pay some conversion charges, which are generally around one per cent of the home loan outstanding. You can even consider shifting to another lender, to avail of fixed rate home loans. Presently, no prepayment penalty is charged by home finance companies or banks, for borrowers under floating home loan regime.
So, borrowers, whose EMIs will go up and are not in a position to service the enhanced EMIs, have a few options to overcome the situation. In case the tenure of your home loan ends well before your retirement date, you can request your lender to extend your home loan tenure, so that the amount of the EMI remains the same. In case this is not feasible and you have some surplus funds available, you can pay part of the home loan and then, request the lender to reduce the enhanced EMI.
However, as the interest rates have bottomed out and the interest rate cycle is reversing, you will see more rate hikes in future, which will necessitate increasing the amount of the EMI for home loan borrowers.
Since the interest rate cycle is reversing, it makes sense for home loan borrowers to search for fixed rate home loans. Only a few lenders presently offer fixed rate home loans. So, the borrowers who can get their lenders to shift them to a fixed rate regime, should avail of the opportunity immediately, even if one has to pay some conversion charges, which are generally around one per cent of the home loan outstanding. You can even consider shifting to another lender, to avail of fixed rate home loans. Presently, no prepayment penalty is charged by home finance companies or banks, for borrowers under floating home loan regime.
So, borrowers, whose EMIs will go up and are not in a position to service the enhanced EMIs, have a few options to overcome the situation. In case the tenure of your home loan ends well before your retirement date, you can request your lender to extend your home loan tenure, so that the amount of the EMI remains the same. In case this is not feasible and you have some surplus funds available, you can pay part of the home loan and then, request the lender to reduce the enhanced EMI.
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