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Why SBI MCLR Rate or Repo rate changes should not be the only factor for housing loan decisions?

The majority of borrowers, especially those with house loans, eagerly await the announcement whenever word of the RBI’s MPC meeting spreads because they believe that a rate decrease that lowers their home loan interest rate will have an immediate impact on their loan EMIs. But that’s not always the case. We explain why rate changes shouldn’t be the only factor influencing your decisions about home loans in order to provide more clarity regarding this process and the steps that borrowers of Home Loan for Salaried Person must take:

Repo rate’s impact on bank lending rates


The Repo rate is the interest rate at which the central bank RBI lends to the nation’s numerous commercial banks whenever those banks run out of money. First, borrowers must comprehend how banks determine their lending rates. The SBI MCLR Rate is not solely determined by the repo rate. In addition, when determining their lending rates, banks take into account their cost of capital, operating expenses, and tenor premium. Together, these three elements and the repo rate have an impact on the interest rate for house loans.

The internal benchmark interest rate (MCLR) below which a bank cannot provide a loan is the marginal cost of funds-based Lending Rate (MCLR). On account of changes in the RBI’s policy rates, the MCLR-based system delivers higher transfer of benefits to borrowers than the base rate system and is more transparent than the latter. All banks must assess and disclose their MCLR every month for all tenures, according to a mandate from the RBI.


The markup (spread) that banks may charge over their MCLR is often based on the size of the loan at issue and the credit history of the customer. Therefore, after taking into account the SBI MCLR Rate plus markup, if any, the effective rate of interest, or the actual rate of interest the borrower would have to pay for the loan, would be computed. It’s crucial for current house loan borrowers to keep in mind that their existing EMIs won’t change right away but rather when the loan’s reset date comes around in rising rate regimes.


Reset loan frequency and duration

The MCLR regime’s pre-set loan reset dates make sure that, despite any changes in the lending rates of the banks during the interim period, the borrower’s EMIs won’t be instantly impacted by the house loan interest rate, which won’t change until the next reset date. When interest rates are rising, this helps the borrower pay less in interest, especially if they choose a longer reset time.


Additionally, a longer reset period gives the borrower more time to choose their next course of action before the subsequent reset date. According to the RBI, banks may offer loans with reset dates that are either tied to the date of the loan’s initial disbursement or to the date of the MCLR’s review; however, this information must be disclosed in the loan agreement. Additionally, the frequency of reset must be one year or less.

When should you choose to transfer your balance?

Borrowers of Home Loans for Salaried Persons should exercise extreme caution before impulsively choosing a balance transfer anytime the RBI adjusts the repo rate. An increase in the repo rate won’t automatically result in an increase in the lender’s MCLR because the repo rate is one of the factors and not the only factor used to calculate MCLR. Furthermore, before switching to the lender offering a cheaper rate, the borrower needs to consider the “total savings in interest cost” even if the lender’s MCLR has increased and your previous home loan’s interest rate is scheduled to increase with the arrival of the loan reset date.


How may the whole cost of interest be calculated?

Borrowers must make sure they check the rates offered by other lenders as well and determine the possible savings in interest costs upon transferring the loan to the chosen lender, rather than just choosing the lender giving a lower interest rate than the interest rate on Home Loan for Salaried Person.


Consider the associated fees, if any, before submitting an application for a balance transfer. Your request for a balance transfer is typically treated by the new lender as a brand-new loan application, and as a result, fees such as processing fees and administrative costs may be assessed. Don’t ignore these fees because doing so could lessen the overall benefit from interest cost savings. Only proceed if the overall net savings are significant after accounting for such fees and charges. If not, think about sticking with your current lender while attempting to bargain for better terms and services.


Also, not to ignore, here are some advantages of HLBT in addition to overall interest savings:


Better loan features with a new lender: Since the new lender will treat your request for a balance transfer as a new loan application, the terms and circumstances will also change. This is because you are hoping to receive better loan features in addition to a reduced interest rate of Home Loan for Salaried Person. The borrower might ask the new lender to increase the loan tenure if they want to lower their monthly payment. Additionally, if the borrower needs a larger loan amount than what is already owed in order to make repairs, renovations, etc., to their residential property, they can even ask the lender to approve it.


Also, borrowers currently making payments on a home loan under the base rate regime should consider a balance transfer to a loan with an interest rate tied to the SBI MCLR Rate, regardless of whether or not the policy rate or the home loan rate offered by their current bank changes. In contrast to banks, most housing finance companies (HFCs) employ the PLR (Prime Lending Rate) regime to calculate their Home Loan for Salaried Person lending rates because they are not required by the RBI to adhere to the SBI MCLR Rate system. 

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