The repo rate increase of 25 basis points by the Monetary Policy Committee (MPC) on August 1, 2018 took many by surprise, both the experts and the commoners. The latest repo rate increase followed a similar rate hike in the last Monetary Policy Committee (MPC) meeting held just two months ago. Most were expecting a repo rate hike in the October MPC meeting followed by another hike by the end of FY 2019.
However, with the major central banks increasing their policy rates, depreciating rupee requiring steady RBI intervention and a steady increase in inflation, RBI could have done little other than to raise policy rates. Even the tightening liquidity had already led banks and NBFCs to pre-empt RBI by increasing their deposit and lending rates.
The back-to-back hike in repo rates seems to be the start of a rising interest rate regime. Interest rates of loans will steadily go up for existing home loan borrowers as with all loans on floating rates. This will steadily increase their EMIs and upset their disposable income and savings rate.
However, as home loans can vary widely across banks and NBFCs, existing home loan borrowers can still bring down their EMI by transferring their existing home loan to another lender at a lower rate. Here are some of the benefits of transferring home loans:
Reduced interest cost
The prime reason for transferring home loans to another lender is to save on the interest costs by availing a new home loan at lower interest rate. For example, assume that an existing home loan borrower with an outstanding loan amount of Rs 20 lakh at 10% p.a. has a residual loan tenure of 15 years. Now, if he transfers his home loan to another lender at 9% p.a. for the same tenure, he will save over Rs 2.17 lakh in his entire tenure. His EMI will come down from Rs 21,493 to Rs 20,286 saving Rs 1,206 per month in the process.
Remember that once your home loan balance transfer (HLBT) application gets approved, the new lender will charge various charges and fees like processing fees, administrative charges, etc associated with a fresh home loan application. As these charges put together can constitute a substantial amount of money, find out the net savings by deducting those charges from the amount saved in interest payments. Opt for HLBT only if the net savings is substantial or else continue with your existing lender.
Better loan features
As the new lender will consider your HLBT as a new loan, it will apply its own set of terms and conditions before approving your application. If you wish, you can use this opportunity to extend your loan tenure to reduce your EMI payout. You can also ask for a bigger loan amount than your current outstanding to carry out repairs, renovations or extensions to your home property.
Switching to MCLR
Unlike banks, housing finance companies (HFCs) use PLR regime for setting their lending rates. Compared to the PLR system, MCLR is a much more transparent rate-setting mechanism and has better transmission of rates. The MCLR regime also provides for a mandatory interest rate reset date, at least once in a year.
Your bank can change your loan rate only on that date irrespective of the changes in the MCLR rates in the interim. The MCLR prevalent on your reset date will apply on your home loan till your next reset date. As this feature decreases the volatility in the loan rates, it will reduce your interest cost in a rising interest rate regime. Thus, opt for home loans with the longer reset period, preferably the 1-year reset period.
Availing top-up loans
Many lenders offer top-up home loans on transferring your existing home loan. The top-up loan amount would be over and above your existing outstanding loan amount. These top-up loans don’t come with any end usage restriction on loan proceeds.
As with personal loans, the loan proceeds can be used for any purpose, such as for renovating homes, meeting medical expenses, for holidays or even for buying a car . Top up home loans are also an excellent instrument for consolidating your debt as their interest rates are usually lower than personal loans and most of the other secured loan types.
You can avail a top-up home loan and use its proceeds to pay off your other existing loans. Thus, opt for aanHLBT if your existing home loan refuses to sanction you a top-up home loan.
Naveen Kukreja is CEO and co-founder,