Friday, 24 March 2017

2 Good Ways To Reduce Your Existing Home Loan Interest Burden

Posted by RaviKumar Nama
(Posted on 25-Mar-2017)
Post to Demonetization, Banks are flooded with cash deposits. This huge cash reserves giving cushion to banks to reduce their lending rates. Hence, Banks started reducing the interest rates from the beginning of this year. Especially, the retail rates that are linked with MCLR (Marginal Cost Based Lending rates) are reduced considerably. However, Banks are reducing the interest rates only for New customers and not for the existing customers. Many people who are already availed Home loans are expected the benefits of Interest rate cuts, but Banks did not transfer the benefits of Rate cuts to the existing customers. Currently Banks are issuing home loans at 8.6% - 9.1%. However, old home loan interest rates are in the range of 9.5% - 11%. Hence, many people are looking the options to reduce their existing home loan interest rate burden. We can consider the following 2 options to reduce your existing  home loan interest burden.


2 Good Ways To Reduce Your Existing Home Loan Interest Burden:

Banks are following 2 types of Interest Rate systems. One is Base Rate system and another is MCLR-Based Rate system. For loans, that are taken before 31-March-2016, Base Rate system is applicable, and the loans taken after 01-Apr-2016, MCLR-Based Rate system is applicable. Currently Banks are reducing the interest rates on MCLR-Based loans and not on Base Rate system loans. We will see what are the good ways to follow to avail the benefits of rate cuts on the old loans:

1. Transfer From Base Rate to MCLR Based Rate:


As we mentioned above, Home loans taken after 01-Apr-2016 are comes under Base Rate system and the interest will be calculated on Base Rate based. But all Banks are reducing their MCLR rates. For example, SBI current MCLR is 8% and Base Rate is 9.25%. Since last 1 year, SBI reduced their MCLR approximately 1.2% , bur they reduced their Base rate just 0.05%. Home loan interest rate for the loans taken before 31-Mar-2016 are at 9.5% where as the new home loan interest rate is only 8.65%. The difference between MCLR based interest rate and Base Rate interest rate is almost 0.85%. So, to avail the reduced interest rates, the existing Home loan customers should transfer their Loans from Base Rate to MCLR based. The following table illustrates the benefit of transferring your Home loan of 25 lakhs for 20 years time based from Base Rate to MCLR Based Rate system:


                     Total Benefit in interest: Rs. 3,28,560

To transfer your Home loans from Base Rate system to MCLR based Rate system, you need to submit a letter to the Bank. Some Banks collecting a fee of 0.5% of your total outstanding loan to transfer from Base to MCLR. Some Banks are doing this transfer at free of cost. This is the easiest and most convenient way to avail the Rate cut benefit for old loans. There will be no processing fee, Legal fee and no need of showing any documents to the Bank.

2. Transferring the Loans To Another Bank:

Currently Banks are sitting on huge deposits because of the Demonetization. Hence, Banks have to lend these deposits to the customer to earn profits. Banks are understanding this competition and are coming with innovative Home loan products to attract the customers in the Market. Even NBFC (Non-Banking Finance Corp) are also reducing their home loans and giving tight competition to the Banks. Hence, the Home loan interest rates are gradually decreasing and will further decrease in the coming days. So, there is no need to hold your home loan with the existing Banks and can choose another Bank or NBFC who are giving loans at the lowest interest rates. However, before transferring your home loan from one Bank to another Bank, you should consider the Interest rate difference between the existing Bank to the new Bank. If the difference is 1% or more, then only you should consider this option. If the difference is less than 1%, then no need of transfer your home loan. One disadvantage of transferring the Home loan to another Bank is, you should pay Processing fee, Legal charges and Documentation.

Current Home Loan Interest Rates:



    (Source: deal4loans) 

Conclusion:

Now-a-days, every one is taking home loans from the banks. These loans are not only cheapest loans but also give tax benefits. However, you should always monitor your home loan interest rates and if there is any opportunity available to reduce your interest burden, you should immediately take some action and search for various ways and consider the most convenient option to reduce your home loan interest burden.

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