When the RBI lowers the repo rate, it also benefits other bank customers. Because after the repo rate is low, other banks also reduce the interest rates of loans like car loan, home loan, personal loan etc. If your home loan EMI is high even after the repo rate is low, this is a matter of concern. So through this article we are going to tell you why your home loan EMI is still high.
Interest rates may be lower
Most of the borrowers borrowing from banks are not aware that the benefit of deduction on interest rates is applicable only to new borrowers. If current borrowers have taken home from banks, then most borrowers have home loans taken at the base rate. If the borrower takes home loan from NBFC, then these loans are prime lending rate loans. The bank’s base rate has been changed from MCLR. Therefore, the rates of home loans taken between 2010 and 2016 are lower under the base rate system or PLR system depending on the bank and NBFC. But under the PLR system, lenders do not want to reduce the rates of borrowers, so you are still paying the loan at a higher interest rate.
Is your EMI higher even after a home loan based on MCLR?
You may not get the immediate benefit of this even after banks have announced lowering interest rates, as different banks have different reset periods. For example, suppose the reset period of a home loan in SBI is one year, whereas the reset period of Kotak Mahendra Bank is 6 months. Banks can keep the reset period up to a maximum of 1 year as per RBI regulations. Therefore, you will have to wait for the reset period to finish to take advantage of the MCLR rate reduction.
What is the date of reset MCLR?
The reset period of a home loan is usually stated in the loan agreement. The MCLR reset date represents the date on which the MCLR is reset for the new interest rate. Banks can reset MCLR rates on an annual, half-yearly or quarterly basis. However, according to RBI, banks can keep the MCLR rates the same for a maximum period of one year. After one year they have to reset the MCLR. So if your bank has not reset the MCLR rate yet, then you will have to wait. If you want to see when it will reset, you can see this in the loan agreement.
Does your loan rate remain high even after the bank reset MCLR?
If your loan rate remains high even after the bank has reset the MCLR, in this case you will have to find out whether your home loan is based on floating interest rate. A home loan taken at a floating interest rate has the benefit of lower interest rates, but if the interest rate of your home loan is fixed, then the interest rate remains the same during the entire duration of the loan. There is a type of home loan in which interest rates are pre-determined for an initial period of 3 to 5 years.
After the end of the initial term of the home loan, the interest rate of the loan is automatically based on the floating rate. The reason for your EMI being too high may also be that somewhere in your loan agreement there is a matter that you will have to make a request to apply the new rates of interest. Most lenders include such terms in their loan agreements. However, such a condition does not apply when interest rates rise.
After all, is your home loan EMI higher??
In this case, borrowers can switch the base rates of home loans to MCLR rate. However, the MCLR is not a fully floating rate, as the floating rate changes, while the MCLR has fewer changes than this. If you switch to MCLR and as soon as MCLR is reset, you can take advantage of lower interest rates. Along with this, it also has an impact on MCLR if RBI changes the repo rate. If you want to pay at a lower rate of interest, then take a loan from the bank that resets the MCLR every quarter.
Lenders can change
Sometimes it is a good idea to change your lender. But by doing this you should analyze whether it will benefit you or not. You must calculate the difference in loan transfer expense, new EMI and new and old EMI to evaluate the overall benefit from changing the lender. Along with this, processing fees, stamp duty, legal charge etc. should be calculated. Based on the appraisal, you will be able to decide whether changing the lender is correct or not.