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Why is Your Home Loan EMI Still High? Research Team | Posted On Friday, November 01,2019, 05:38 PM

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Why is Your Home Loan EMI Still High?



With the banks announcing rate cuts the borrowers of car loan, home loan and personal loan are sure to be benefitted. But if your home loan rates are still high here is what you can do:

Rates Are about To Come Down:

Many borrowers are unaware of the fact that the rate cuts announced by the lender apply only to new borrowers of home loan. Home loans of many existing borrowers are mainly base rate loans if they are with the bank or are prime lending rate loan if they are with the NBFCs.

Now the MLCR has replaced the base rate for banks. So home loans avail between 2010 to 2016 falls under the base rate system or the PLR system depending on the bank or the NBFC from which it is availed. Lenders are reluctant to pass on lower rates to borrowers under the PLR system which is why they are still paying an interest rate of 9% or more.

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See Also: 3 Major Banks Reduce Home Loan Interest Rates

Do you have an MCLR Home Loan but your EMIs are still high?

Now despite the rate cuts announced by banks, you may not get benefitted immediately. This is because the reset period of the banks varies from one bank to the other. For example, the home loan reset period for SBI is one year whereas it is 6 months for Kotak Mahendra Bank.

As per the regulation of RBI, the banks can keep the reset period up to a maximum of 1 year. So to enjoy the benefits of the MLCR rate cuts you have to wait out the reset period.

What is an MCLR reset date?

The reset period of the home loan is generally mentioned in the loan agreement. MLCR reset dates refer to the date on which the MLCR will be reset to reflect the new interest rate. Banks are allowed to reset the MLCR rates annually or half-yearly or quarterly. However, as per RBI guidelines the maximum reset period for home loans in 1 year. So, if your bank is yet to reset the MLCR rates you have to wait till your MLCR reset date.

See Also: MCLR Rate - Impact of MCLR on Home Loans

Your lender’s MCLR rate has been reset but your loan rate is still high?

In such a scenario you need to find out whether your home loan is based on a floating interest rate or not. Home loans availed with floating interest rate will be able to enjoy lower rate cuts. If your home loan has a fixed interest rate then you have to pay the same interest throughout the tenure.

There is also another variant of home loan where the interest rates remain fixed for the initial period of 3 to 5 years. Once the initial period is over these loans automatically becomes floating-rate loans.

A second reason why your EMI may still be high is if your loan clause states that you need to initiate a request for the new rates to get implemented. Most lenders include such clause in their loan agreement. However, the same does not apply when the rates are going up.

So, if your lender is charging you the old rates you can ask your lender to switch the rates to enjoy lower rates on your home loan. You may even have to pay a fee to make the switch. Often these are just one time charges.

See Also: How SBI Repo-Rate Linked Home Loan Works?

Still servicing a high Home Loan EMI? Here’s what you can do.

 Borrowers can consider switching their base rate home loans to MLCR loans. Though they are not pure floating rate loans their interest rates are more often reset. You can get benefitted through lower interest rates as soon as your MLCR is reset. The banks will consider the prevailing rates on the reset dates. Also whenever there will be changes in interest rate by RBI the MLCR will be impacted. To get the best deal, choose a lender who resets the MLCR every quarter.

Choosing another lender?

Changing your lender is a good idea. But before you take any action it is important to analyse the cost-benefit by changing your lender. This evaluation will tell you whether it is worth making the switch to a new lender.

To evaluate the overall benefit, you must calculate the cost of the loan transfer and the new EMI and calculate the difference.

You must also consider other loan costs like processing fees, stamp duty charges, legal fees and valuation charges. As per experts, this fee can estimate up to 5% of your present loan amount. So exercise caution when changing your lender.

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