You have waited a long time to buy your dream home. Too long perhaps…. The Prime Minister says….So many years have passed after Independence. Yet, the poor in our country, do not have their own home. Houses are out of the reach of even the middle class. The Government wants the poor, middle class and the neo middle class, to have their own home.
The Government is putting a lot of pressure on banks, to reduce lending rates on home loans. Banks especially public sector banks, have reduced interest rates on home loans. Now, home mortgage lenders and even Private sector banks are reducing home loan interest rates. So is this the best time to avail a home loan and buy your dream home?
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Some of the largest public sector banks in the country, are cutting interest rates on home loans. You could be looking at the cheapest home loans, in the last 6 years. After the scrapping of 500 and 1000 rupee notes, citizens deposited their old notes at banks. Banks are flush with cash and are getting ready to lend…BIG TIME. Now home mortgage lenders and even Private sector banks, are reducing interest rates on home loans.
Banks shifted to the MCLR (Marginal Cost of Funds Based Lending Rates) in April 2016. What is MCLR? MCLR is the new benchmark lending rate, banks lend to new borrowers. All floating rate loans are linked to MCLR. Home loans, Loan against property and even corporate term loans are linked to MCLR.
If your home loan is linked to MCLR, the bank sets a reset clause. This reset clause can be 6 months or even a year, depending on the bank. This means your interest rate gets reset (changed), every 6 months or 1 year.
How does MCLR work? Under MCLR, interest rate is reset after every 6 months or 1 year. This depends mainly on the deposit rates at that time. If deposit rates are higher, then home loan interest rates would rise. If deposit rates are lower, then home loan interest rates would fall.
After the scrapping of 500 and 1000 rupee notes, citizen’s deposited old rupee notes in banks. Most of this money is deposited in savings and current accounts. Banks pay very less interest on savings bank accounts and may or may not offer interest on current accounts.
With most of the money banks require to lend, coming from savings and current accounts, where banks pay very low interest on deposits, banks have cut fixed deposit rates. Fixed deposits are offered by banks at higher rates of interest than savings bank accounts. If banks are able to get most of the money they need to lend, from savings bank accounts, where low interest is paid on deposits, why offer high interest rates on fixed deposits? As banks are paying very less interest on deposits, it’s a good time for them to reduce lending rates, especially on home loans. This helps banks to retain existing customers and tap new customers.
If you are availing a home loan for the first time from a bank and want to buy your dream home, this is a great chance, you must not miss. Interest rates on home loans offered by banks, are the lowest in several years.
Your eligibility increases: First time borrower availing a home loan from a bank? With a cut in interest rates on home loans, your loan eligibility goes up. Let’s say before the cut in home loan interest rates, you were eligible to get a home loan of INR 55 Lakhs with a tenure of 20 years, on a monthly salary of INR 1 Lakh. A 50 basis points (0.5%) cut in home loan rates, could mean you are now eligible for a home loan of INR 58 Lakhs on a tenure of 20 years with the same monthly salary.
Your home loan repayment tenure comes down: If you are an existing borrower (availed a home loan a few years ago) and your bank has cut home loan interest rates, your bank would not reduce your home loan EMI. Instead, the bank reduces the tenure of your home loan. Let’s say you had availed a home loan with a home loan interest rate of 9.15% and a repayment tenure of 20 years (240 months). Your bank has cut home loan interest rates to 8.25%. Will your home loan EMI go down? No, it remains the same. The bank cuts the tenure of your home loan, while your home loan EMI’s remain the same. You will find your home loan tenure reducing from 240 months to 206 months.
Your 20 year home loan, is now shorter by almost 3 years. Your home loan is paid off, nearly 3 years earlier, because of the home loan rate cut.
With property prices expected to fall after demonetization and banks having a lot of money to lend and so cutting home loan rates, this is perhaps the best time ever, to buy your dream home. If you are a serious home buyer looking for that first home to stay…Why wait? Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.