The New Year brought in a reason to rejoice for house loan borrowers. The home loan interest rate saw a further dip and here’s what’s important to note.
How do the old borrowers benefit?
The old borrowers who have been servicing their EMIs based on the erstwhile base rate system of lending are the main beneficiaries of this interest rate cut. They now have a stronger reason to switch to the MCLR – based lending, even though the base rate hasn’t come down as much but the difference between base rate at which old borrowers are servicing their loan and the current MCLR is widening.
Why should you switch?
The benefits of RBI rate cuts have been given rather sluggishly to borrowers, which is the main reason to switch from base rate to MCLR.
What to watch out for?
The home loan interest rate at present seems to be in place for a certain period of time. The only disadvantage could be the interest rate cycle turning. There is always a risk of an upward movement of interest rates before reaching the reset period.
What are the options for base rate borrowers?
The tenure is automatically reduced when the interest on your loan goes down, thereby, transferring the benefit of lower rate to the customers.
The base rate borrowers now have two options – switch to MCLR based lending with the lender or else, transfer. One may also continue the loan on base rate, especially if the loan term is nearing the end.
The switch to MCLR by base rate borrowers is allowed by RBI. The existing loans can run till maturity or borrowers can switch to MCLR on mutually agreed terms.
Switching in the lending institution
In case the difference between what you are paying and what is being offered now as MCLR is significant, it makes sense to switch. Also, in cases where the home loan tenure is still away from closure, it’s sensible to make a home loan balance transfer.
Switching to another lender
If you are being offered a high housing loan interest rate (MCLR plus spread) then look for refinancing. In such a case, get the loans refinanced from a lender offering a lower interest rate and make a home loan transfer. Also Read: Your Checklist for Home Loan Transfer
Switching to MCLR in itself should help you save a substantial amount. In addition to switching the loan from base rate-linked to MCLR and thereby saving interest, prepare a systematic partial prepayment plan to further reduce the interest burden. Therefore, it is advisable to analyse and switch your existing home loan provider whenever there is a home loan interest rate cut.