Lower rates an opportunity to re-negotiate your home loan interest

Start by shifting to repo-linked rates, then seek the lowest rate being offered by lender

The Covid-19 crisis has hurt borrowers in many ways. The only respite some may have got is the reduction in the rate of interest on home loans. Most lenders have cut rates after a nudge from the government and the Reserve Bank of India. Also, with the system flush with liquidity, lowering rates may be the only way to attract new borrowers.

“If there is a difference of 75 basis points (bps) or more between the existing rate and the rate that our client is paying, based on calculations for shifting and other costs, we advise clients to move,” says Suresh Sadagopan, director, Ladder7 Financial Advisories.

In current times, there is a strong case to move for two reasons: Home loan rates are at multi-decade lows and many would be feeling the pinch after the recent salary cuts and/or job losses.  

Currently, State Bank of India’s Maxgain rate linked to its external benchmark — the repo rate — is at 6.95 per cent.

ICICI Bank’s rate also stands at 6.95 per cent. There will some risk premium over this rate, but most are lending at 7-7.5 per cent. A couple of years back, these rates stood at least 100-150 bps higher.

 

 

For borrowers who took home loans after October, all new home loans would be linked to an external benchmark or the repo rate. With every repo rate cut, they would have benefited because lenders adjust rates after every three months.

However, this is a good opportunity for old borrowers on marginal cost of funds-based lending rate or MCLR or even older regimes to shift their loans to these lower rates, and if they are not getting a good deal, shift lenders as well.

“Shifting regimes within the same bank is often a problem because there is resistance. Shifting lenders may be a better idea. But one needs to factor in additional costs,” adds Sadagopan.

How will the new numbers look?

Say, you had taken a 20-year Rs 50-lakh loan at the rate of 9 per cent two years back, the equated monthly instalment (EMI) would be Rs 44,986. After two years, the outstanding would be Rs 48.04 lakh. Now, if you shift the outstanding at the rate 7.5 per cent for 20 years, your EMI would be Rs 38,700 — a difference of Rs 6,285 per month or Rs 75,432 in one year.

Even if you are not facing any fund crunch, shifting still makes sense because you can reduce the tenure. For example, in the same case, if the new loan is taken at the 7.5 per cent for 15 years, the new EMI would be Rs 44,533 — still less than Rs 48,986 you were paying, and tenure would be reduced by three years or 36 months. It means a neat saving of Rs 17.63 lakh. No wonder, even if there is a fee of Rs 20,000-50,000 to shift, it still makes sense to do so.

Of course, financial planners have to factor in many probables before recommending a shift. Most borrowers tend to repay the home loan before the entire tenure. All these factors have to be considered before shifting. If you intend to prepay a 15-year loan in the next five years, it may not make too much sense to shift. “However, given the tax benefits it provides under both on 

principal and interest payment, retire this loan as the last measure,” says another financial planner.