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Why Your Home Loan Gets Cheap This October? Research Team | Posted On Monday, September 16,2019, 01:34 PM

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Why Your Home Loan Gets Cheap This October?



Why Your Home Loan Gets Cheap This October?

If you are planning to buy your dream home this October, there’s good news. Your home loan EMIs just got cheap. Banks will soon move from MCLR to external benchmarking. The home loan EMIs would drop and you save on home loan interest.

Why is this so? Banks would shift from MCLR to External Benchmarking. From October, banks will offer you external benchmark-linked loans, not limited to just repo-linked loans. Most banks are linking home loan rates to repo rates.

Do remember that this shift is for floating rate loans and not for fixed rate loans. Home Loans would shift to the new regime while car loans, personal loans would remain unchanged. The new regime (external benchmark-linked loans) apply only to banks and not NBFCs. HDFC would not shift to the new regime.

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See Also: From Today, SBI Home Loans Get Cheaper

Why Your Home Loan Gets Cheap This October?

1. Lower Interest on home loan:

RBI has been cutting repo rates. Repo rate currently stands at 5.4%. The RBI would most probably reduce the repo rate to 5% in the coming months. (Repo rates are close to a 15-year low).

However, repo rate-linked home loans can be a double-edged sword. If RBI raises the repo rates, your home loan EMIs could shoot up.

SBI currently offers MCLR linked home loan at 8.25%. SBI offers repo rate-linked home loans at just 8.05%. This is a repo rate of 5.4% + repo-linked rate of 2.25% + (spread of 40-55 bps depending on CIBIL score). A person with a good credit score can get SBI Home Loan at 8.05%.

2. Increase Transparency

Yes, your home loans are very transparent. With the external-benchmarking of home loans, you get to know exactly how much home loan interest you pay.

You get to know the exact home loan rates, how much you are charged and why you are charged. You also get to know why your home loan rates are moving up or down.

3. Faster reset clause

Let’s say your bank has cut MCLR rates. If you are an existing home loan borrower, your home loan rates will not fall immediately. This is because of the bank’s reset clause. Now, SBI has a one-year reset period while Kotak Mahindra Bank has a 6-month reset period.

How does the MCLR reset clause work?

Let’s say you had availed an SBI MCLR Home Loan in June 2019. Now, SBI has cut MCLR by 10 bps in August. Your home loan EMIs will reduce only in May 2020 as SBI has a one-year reset clause.

Now, the advantage of an external benchmark linked home loan is a faster reset clause. The SBI repo-linked home loans are reset on a monthly basis. If RBI cuts repo rates in a particular month, you enjoy the benefits of this rate cut in the following month.

What if you are an existing borrower?

If you are an existing borrower, you don’t get the benefit of external benchmarking. You would have to visit the bank branch and request a change. Banks would have very reasonable administrative charges when shifting you and other existing home loan borrowers to the new regime.

If your bank has a very high spread on repo-linked home loans, you may have to switch your home loan to a new bank which has a lower spread. When to opt for home loan balance transfer? Do your home work before shifting home loan. It’s not a wise decision to shift home loan if the gap is less than 50 bps.

Many banks have a higher margin on repo-linked home loans. But, this may come down due to higher competition. This could be a great time for home loan balance transfer to enjoy lower home loan EMIs.

Avail home loans with poor credit score

The Government would launch a fund which would offer guarantees to people who are not eligible for home loans. This is very good for home loan borrowers with poor CIBIL score. These borrowers don’t usually get home loans sanctioned. This Government guarantee helps lower home loan rates for those otherwise eligible for home loans.

You and other borrowers would have to pay a fee to enjoy guaranteed home loans. This helps those with no steady income and poor credit scores get a house. This would also help the housing market which is plagued by bad debts and inventory pile-up.

Things to know on Repo-linked lending rate home loan:

  • Only floating rate: If you have a floating rate home loan, you can opt for repo-linked lending rate or RLLR home loans. Changes in repo rates have no effect on fixed rate home loans. (An exception would be a drastic rise in repo rates, forcing banks to revise home loan rates).
  • Affordable home loans: The RBI has been steadily cutting repo rates. The repo rate stands at 5.4%, but could be cut to 5%. This means RLLR home loans could be very affordable vis-a-vis MCLR Home Loans.
  • Transmission of rates are swift under RLLR Home Loans.
  • You have to stay alert to reap the benefits of RLLR home loans. If you find your bank is not offering lower home loan rates, opt for home loan balance transfer.
  • Understand the calculations involved in RLLR home loans.
  • If you have a bad credit score you end up paying higher home loan rates.
  • Opt for RLLR home loans, only if you are comfortable with risk.
  • You will have to maintain a certain balance in RLLR home loan account, to avoid defaults if repo rates rise and home loan EMIs go up.

See Also: How to Switch to Repo-Linked Home Loan?

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