The RBI has mandated that banks should base the interest rates of the home loans that they give on MCLR (Marginal cost of funds lending rate) as against the PLR (Prime Lending Rate) which they used to base it on earlier.
They have changed over for the loans that they are now disbursing. However, if you have an old home loan that you are paying EMIs for, do call the bank and give them an application in writing to change over the basis of your interest rate to MCLR. They do NOT do it automatically.
I was just watching a program on TV and thought these points will be of interest.
- To change over to a MCLR based interest rate, your lender will charge some fees – depending on the loan and the tenure remaining, it may be close to Rs.10,000.
- Since you will be paying fees, then it might be worth your while to look at an alternative lender who is giving a lower interest rate.
- Calculate the savings due to the lower interest rate as against the fees you will be paying. Sometimes the loan company may ask you to register the document also. This entails stamp duty to be paid and that will mean more costs. There are tools and calculators online to help you take a decision. There was a guy from bankbazaar.com who said that there were some on his website also.
- The EMI is calculated in such a way that initially, there is a very high outgo towards interest payment. As time passes, the interest repayment component in the EMI reduces and more of the principal is paid off. So, it is useful to opt for the lower interest rate only if you are at the initial stages of the loan repayment.
- When you go to a new lender, most of them offer or gently ‘nudge’ you towards a special loan that they have devised – a ‘two year fixed and then floating after that’ loan. I personally feel that one should not consider this at all. One, the interest rates are expected to fall further, so why accept a ‘fixed’ interest rate. Secondly, if one has a fixed rate loan, then any prepayment of the loan attracts penalties. Prepayment on a floating interest rate loan has no penalties as mandated by the RBI.
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