Switch lenders if home loan rate is too high; go for banks over HFCs

New borrowers should go for banks over HFCs as the new benchmark - MCLR - is more transparent

As lenders hike their benchmark rates, new customers will see their eligibility go down. Existing borrowers on marginal cost-based lending rates (MCLR) would not be affected much. But if your loan is not linked to MCLR or you are a borrower with a housing finance company, you will need to act if the interest rate on your loan is too high, say, over nine per cent.

HDFC recently increased its lending rates by up to 20 basis points (bps) for the first time since December 2013, marking a shift in the interest rate trajectory. 

In March, State Bank of India, ICICI Bank and Punjab National Bank had also raised their marginal cost-based lending rates (MCLR) by 15-20 bps. 

As home loan interest rate starts creeping up, it impacts the eligibility of borrowers. If an individual was eligible for a Rs 5 million loan for a 20-year tenure at an 8.4 per cent interest rate, an increase of 20 bps in the rate will reduce the eligibility of the borrower by Rs 70,000 or 1.4 per cent of the loan amount. The impact may not seem significant, but most experts are anticipating further rate hikes. “Lenders may increase home loan rates marginally going forward,” says Naveen Kukreja, co-founder and CEO, Paisabazaar.com. If you have been planning to buy a house on loan, finalising the deal in April could be better.

New borrowers are better off if they choose banks over housing finance companies (HFCs) and non-banking finance companies (NBFCs) for a home loan, say experts. They believe that for existing borrowers the MCLR system is more transparent compared to other benchmarks. With NBFCsand HFCs, new customers get the best deal while existing borrowers pay a higher interest on their loans. “If your loan requirement is 75 per cent of property value or less and you have a good credit score, take a home loan from a bank,” says Manav Jeet, MD and CEO, Rubique, an online lending platform.

If you are already with an HFC or NBFC offering a loan at an interest rate of nine per cent or more, it’s time for the borrower to look for a balance transfer. “If the interest on your loan is 50 basis point higher than the existing rate, it’s better to explore other options than staying with the current lender,” says Kukreja. An HFC or NBFC may not negotiate, if you just ask for the latest rates. But if you apply for a transfer, they may decide to come to the table and negotiate. As there is no pre-payment penalty on foreclosure of floating rate loans, lenders don’t want to lose customers. However, before taking that step, check the remaining tenure. 

Sometimes, it might just make sense to stay with the existing borrower because the interest component is almost paid. Bank  customers who have not linked their  home loan rate to MCLR will not be affected much unless the interest rate on their loan is due for a revision. If you have a Rs 5 million loan for 20 years and were paying 8.4 per cent interest, a 20 bps hike will increase your equated monthly instalment (EMI) by Rs 633. “If you are on the base rate system, shift to MCLR-linked loan. Some banks charge a small fee to let you switch, but you stand to benefit from this move over the long term,” says Jeet.