Ways To Trim Down Interest Rate On Your Home Loan
To attract new borrowers, lenders often reduce interest rates on new home loans. But it is difficult for an existing borrower to extract the best deal. For instance, those who have taken home loans before April 2016 are paying a higher interest rate as compared to the borrowers whose loans were sanctioned in May this year.
You can look at the following options.
Switch to MCLR if the bank is your lender
As all loans taken after April 1, 2016, are linked to the bank's marginal cost of funds based lending rate (MCLR), you can switch from a base rate to MCLR. It is a more dynamic option as it is directly linked to repo rate and allows you to enjoy the change in interest rates faster.
But all this comes at a price. Banks usually charge a conversion fee of around 0.5 per cent on your outstanding loan amount, along with taxes. For instance, if your home loan outstanding is Rs 40 lakh, the conversion fee would be around Rs 20,000 plus taxes. As switching to MCLR is a one-time option, you cannot revert to the base rate again.
If NBFCs is your lender, go for a lower rate
If you have taken a loan from housing finance companies (HFCs) or non-banking financial companies (NBFCs), you can reset your interest rate by paying a conversion fee. NBFCs and HFCs do not change the base rate, they change the spread. For instance, a lender with a base rate of 15 per cent and a spread of -5 per cent, would allow you to change your spread to minus six per cent. This would result in a reduced rate of nine per cent [15 + (-6)]. The conversion fee varies from lender to lender.
At the same time, you can go for a reduced interest rate or maintain the same EMI or lower the loan tenure.
If you find that the pact with your existing lender isn't worthy enough, you have the option to refinance or balance transfer loan. It is a long-drawn process because it is like getting the home loan approved all over again. If there is a difference of 75bps or more on the interest rate offered by the new lender and the residual tenure of your loan of more than 10 years, only then it makes sense to refinance the loan.
In a nutshell, everything boils down to the outstanding amount and the remaining tenure.
Also read: How To Avoid Mortgage Mishap
Before you arrive at a final decision it is important to ascertain the total cost you would be incurring to reduce your interest rate. If the fee is exorbitant, there is no point to switch or reset the loan. Take into account the total cost, which includes conversion fee plus taxes. There should be a difference of at least 25 bps in interest rates.
One should also keep the remaining loan tenure in mind. It makes no sense to switch if only a couple of years are left before the loan would be paid off as the EMI largely consists of principal, not interest.
Tip: The spread and conversion charges vary from bank to bank and can be negotiated.