Home loans: You can get the best deals even in the MCLR-based regime

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The Reserve Bank of India (RBI) had announced in December 2018 that home and several other retail loan rates would be linked to external benchmarks from April 1, 2019. However, the central bank has now decided to shelve this proposal indefinitely. While this is indeed a setback, customers can, by staying vigilant, ensure they get the best loan deals within the existing marginal cost of funds-based lending rate (MCLR) regime.

Shift to transparent benchmarks held up: The central bank was earlier keen to usher in external benchmarks to make the rate setting process more transparent. “Banks have always used internal benchmarks such as the prime lending rate (PLR), base rate, and MCLR. The concern with these benchmarks was that transmission of policy rates to the borrower was not transparent. While banks were quick to transmit increase in policy rates, they were slow to transmit reduction in rates,” says Gaurav Gupta, co-founder and chief executive officer (CEO), MyLoanCare.in. Banks enjoy a lot of discretion in calculating internal benchmark rates. An internal study group of the RBI headed by Janak Raj had in its October 2017 report also pulled up banks for arbitrariness in calculating the base rate and the MCLR.

In December 2018, RBI had announced that several floating personal/retail loans would be linked to one of four external benchmarks: the RBI repo rate, the 91-day treasury bill yield, the 182-day treasury bill yield, or any other benchmark interest rates produced by Financial Benchmarks India. Spreads used over the benchmark would remain uniform throughout the life of the loan, unless the borrower’s credit assessment changed. The shift to these external benchmarks was expected to usher in greater transparency. “If the benchmark is external or market-determined, transmission of rates will naturally be transparent and prompt,” says Gupta.

Banks reluctant: Banks, however, opposed the move to link loan rates to external benchmarks. They argued that linking assets (loans) to an external benchmark without linking liabilities could give rise to interest-rate risk for them. Only the State Bank of India has so far linked its savings deposit rate and short-term loans to an external benchmark — the RBI repo rate. One bank, Citi, has voluntarily linked its home loan rate to an external benchmark — the three-month treasury-bill. The rate gets reset once every quarter.

Compare rates online: Visit online portals where you can get to know the best loan offers you can avail of based on your credit score, monthly income, job profile, and other criteria. “Using online portals will conserve your credit score as home loan enquiries routed through them are considered as soft enquiries by credit bureaus, which do not affect your credit score. Direct loan enquiries with lenders are considered hard enquiries and each one reduces your credit score by a few points, thereby affecting your eligibility,” says Naveen Kukreja, CEO and co-founder, Paisabazaar.com.

Improve your credit score: Get your credit report at least six months prior to making home loan applications. “This will allow you to take steps to improve your score if there is a need to,” suggests Kukreja.

In India, the credit score affects borrowers as follows. “If you have a poor credit score, you may not get a loan at all. If you have an average score, you may get a loan, but probably from a non-banking financial company (NBFC), which will charge you a higher rate. But if you have a good credit score, 750 or more, you can get a loan from a top-notch bank at an attractive interest rate,” says Arun Ramamurthy, co-founder, Credit Sudhaar. Some banks, adds Ramamurthy, like Bank of Baroda have begun risk-based pricing of individuals, charging a lower rate from those with a better credit score.  

Existing borrowers should stay vigilant: All existing home loan borrowers should also check at least once a year if the interest rates they are paying now are close to the best rates available in the market. “If your existing lender offers a significantly lower rate to its new borrowers, speak to it and shift to that rate. It can be done by paying a small fee,” says Aditya Mishra, founder and CEO, SwitchMe, a digital home loan broker.

If things don’t work out with your existing lender, consider shifting to another. First, do a few calculations to find out how much you stand to save from the move. The exact amount you save will depend on a number of factors: principal outstanding, remaining tenure, difference in interest rates, and so on. Experts say the difference in interest rates between the old and the new lender should be at least 50 basis points. Factor in processing fee, stamp duty, legal and technical analysis fee, etc to arrive at your net saving from the shift.

Customers whose loans are still linked to base rate, the benchmark used before the MCLR, should immediately shift to the best available MCLR-based loan rate.

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