Home Loan Interest Rates Rising

Home loan borrowers beware, there’s bad news coming. SBI, ICICI Bank, PNB, IDBI Bank, HDFC are all raising lending rates. SBI, India’s largest lender has raised marginal cost of funds based lending rates (MCLR) by 10 basis points. (1 basis point =0.01%). SBI’s one-year MCLR, two-year MCLR and three-year MCLR have been raised to 8.25%, 8.35% and 8.45% respectively.

What is MCLR? Marginal cost of funds based lending rates popularly called MCLR, is the rate at which banks lend to new home loan borrowers. MCLR is very close to the interest rates banks pay on FDs. This makes MCLR much lower than base rates.

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Home Loan Interest Rates Rising

1. Why is MCLR rising?

In the last monetary policy review in April, RBI had kept the repo rate unchanged. But, rising petrol and diesel prices and high inflation could push up the repo rate in the coming quarters. A higher repo rate could push up MCLR rates. Banks have already anticipated a raise in the repo rates and are hiking MCLR rates.

Remember: MCLR impacts only floating rate home loans and not fixed rate home loans.

2. How Does MCLR Work?

When it comes to home loans, banks use the one-year MCLR as the benchmark rate. This means your floating rate home loan will be reset after a year. What does this mean? Let’s say your bank has set a floating rate one-year MCLR at 9.3% with a spread of 20 basis points for loans up to a Crore. This means interest rates will be 9.5%.

Do remember that though MCLR is reviewed monthly, your home loan will be reset once in 6 months or 1 year automatically.

See Also: Tips to apply for a home loan after 45

3. How Does Rise in MCLR Increase your Borrowing Costs?

Let’s understand how a rise in MCLR increases borrowing costs.

• You have availed a home loan of Rs 30 Lakhs from a bank. The tenure of this home loan is 20 years and the rate of interest is 9%.

             The EMI on this home loan is Rs 26,992.

Please check the Home Loan EMI Calculator

• Now MCLR has gone up by 20 basis points. The new interest rates are 9.2%. The home loan amount remains same at Rs 30 Lakhs and tenure 20 years.

The EMI on this home loan is Rs 27,379.

An increase in MCLR has resulted in your EMIs going up from Rs 26,992 to Rs 27,379. This is an increase of Rs 387 a month or Rs 4,644 a year.

4. How to Protect Yourself from High Home Loan Interest Rates?

• You can ask the bank to increase the tenure of the home loan. Your home loan EMIs would remain the same.
• You can opt for part-prepayment of the home loan. This would nullify the effects of an increase in EMIs.

You can check out the fixed interest rate home loan option depending on the outstanding loan amount and the remaining tenure of the home loan. Do remember that banks charge a higher interest on fixed interest rate home loans, compared to floating interest rate home loans.

The difference between fixed rate home loans and floating rate home loans can be as high as 1.5% (150 basis points). Do note that fixed rate home loans are not fixed for life, but only for up to 3 years. After that the bank would change them.

If your home loan is nearly paid off (there’s only a few years left), do not opt for a conversion from floating rate home loans to fixed rate home loans. This is because in the last few years of the home loan, most of the repayments result in paying off the Principal on the home loan. Why pay a higher interest on a fixed rate home loan?

There’s also a conversion fee and you must do a cost-benefit analysis before opting for a change.

When should you opt for a change from floating rate home loan to fixed rate home loan? If you want to repay your home loan in a short tenure say 5 years, then convert the home loan from floating rate home loan to fixed rate home loan. If you want to repay the home loan over a long tenure say 15-20 years, then opt for floating rate home loans as interest rates even out over market cycles.

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