The Reserve Bank of India (RBI) revises MCLR reference rates every month. Thus, home loan rates or rates of any other credit scheme is likely to change every month. Though the rate difference won’t be much most of the times, it can be highly significant if the government takes any major decision in regard to home loan and real-estate sector.
If that happens, the benefits will be passed on immediately to you if you are subscribed to a floating rate home loan, and if your present lender is duly registered with the RBI. However, you might not receive any benefits from a drop-in interest rate if you are subscribed to a fixed interest rate home loan. The same would apply in case your home loan was sanctioned before 1st April 2016, as per BPLR (Benchmark Prime Lending Rate) due to the inclusion of base rate.
What can You do to Receive Benefits from Home Loan Rate Cuts?
Back in 2016, when MCLR was first introduced, existing home loan subscribers were presented with two choices: (1) to continue with the same scheme with no changes in EMI, and (2) use home loan transfer and get refinanced as per MCLR. At that time, existing home loan subscribers who decided to get their loan refinanced as per MCLR got approved for a new home loan at a considerably lower interest rate. For instance, the minimum loan rate as per BPLR was around 10% whereas the minimum rate as per MCLR (as of March 12, 2019) varies in between 8.30% per annum to 8.65% per annum.
That said, there were some loan subscribers who chose to continue with the same scheme. Their debt was almost paid and getting refinancing would have turned out to be expensive for them.
In and all, a home loan balance transfer is one way to receive benefits from the drop-in interest rates. Fixed interest loan subscribers can switch to floating interest rate housing loan to receive benefits from present and future rate cuts. However, the facility comes with its own pros and cons. It might be beneficial for some but for some, the transfer of remaining balance might turn out into a regret. Hence, people thinking of balance transfer must make a subtle decision to ensure the decision to switch lenders turns out in their favor.
How to Decide whether Switching your Home Loan Lender is Lucrative or Not?
Talking about analyzing the profitability of home loan balance transfer, the decision can be taken based on the following factors: -
1. Is it the Only Option?
A balance transfer is mainly done to receive benefits by reducing the overall interest liability, which can be brought down even by doing part-prepayment. You can pay a significant percentage of the remaining principal as part-prepayment and cut down your interest liability.
How? The amount you pay as part-prepayment is reduced only from your principal component and the interest for remaining tenor is recalculated. As evident from the explanation, lower principal balance equals to lower interest payable.
Watch to know How Home Loan Transfer Helps You to Save Money -
2. Can You Renegotiate the Interest Rate of your Existing Loan?
Usually, if you ask you to try to negotiate your existing loan rates with your current lender, they might agree. Negotiation becomes an essential prerequisite if you have a flawless loan repayment record. So, try to negotiate the rates with your current lender. If they agree, your interest liability will go down without even spending a single penny.
3. Is the Time Favoring your Decision?
As said above, a balance transfer is mainly done to receive benefits by reducing the overall interest liability. Taking a cue from the same, you’ll profit from switching your lender only if the money you save due to interest rate difference surpasses the cost of the transfer. That probability is only possible if your home loan was sanctioned recently.
Lenders, be it banks or NBFC, recover most of the interest component in the first few years of repayment. To give you the gist, if you pay the EMIs on time you’ll only be able to settle up to 10% of your principal loan in the first 4 years, 30% by the end of the 10th year. On the other hand, approximately 50% of the payable interest component would have been settled in the first 10 years of repayment. Hence, the timing of balance transfer should be right in order to be in your favor - and so, if you are planning balance transfer, do it in the first three years from the date of sanction.
4. Are there any Extra Benefits?
Last but not least, refinancing your home loan just for the sake of receiving interest rate benefits isn’t enough, especially when the competition is so high. You should look for others, value for money benefits to justify your decision. For instance, most lenders would offer a top up loan facility as an additional feature with their housing loan scheme. If you qualify for the eligibility of those particular housing finance schemes, go for it.