There are very good options available to borrowers whose home loan interest rates have risen over time due to no fault of their own.
Published May 21, 2024 | 2:00 PM ⚊ Updated May 21, 2024 | 2:00 PM
RBI, Delhi
The repo rate, the rate at which banks borrow from the Reserve Bank of India (RBI), has remained unchanged at 6.5 percent since February 2023. Even in the last meeting of the RBI’s Monetary Policy Committee (MPC) in April 2024, the stance on ‘withdrawal of accommodation’ remained unchanged.
Without going into the technical details and the rationale for RBI/MPC maintaining the status quo on the repo rate at 6.5 percent for a long time, the RBI’s sticky lending rate to banks has affected the borrowers of housing loans, personal loans, and vehicle loans.
Higher lending rates for a longer time look imminent until September 2024, the time for the earliest rate cut.
In a scenario of a high home loan interest rate above 8-12 percent, depending on the customer’s profile and CIBIL (Credit Information Bureau) credit score above 750, the main concern lies with the existing home loan borrowers who availed housing loans 3-8 years ago. Interest rates under the variable rate schemes (floating rates) would have increased by 10.5-14 percent for such borrowers.
There are very good options available to borrowers whose home loan interest rates have risen over time due to no fault of their own.
Many borrowers would not even have known that their home loan interest rates have increased as their Equated Monthly Instalments (EMIs) would have remained the same, and the lending institutions would have increased the tenure of the loan.
There are cases where the AI software of a few lending institutions has automatically determined and extended loan tenures beyond 70 years of age of borrowers, particularly among certain salaried / business-class borrowers.
To opt for a ‘reset’ of interest rate with the existing bank/housing finance company (HFC) itself. This saves time and avoids the hassles of “rate shopping”, filing new applications, paying additional processing fees and addressing fresh CIBIL issues.
Most banks/HFCs offer a ‘reset route’ and provide reduced rate advantage with nominal ‘reset fees’ to existing borrowers with prompt repayment track records. The reset rates will have a ‘rate reduction’ cap of 1-2 percent of their existing interest rates and may not match the prevailing rates commencing from 8-9 percent. This prevents the borrower from the rigmarole of undergoing the entire loan process with a ‘new suitor’, and the bank/HFC retains a loyal customer.
Further, this option is advantageous to borrowers who have completed more than half of their loan tenure, during which most of the interest component would have already been paid.
Now is an excellent opportunity for existing borrowers with a loan tenure of 10-25 years and a proven track record of excellent repayment to ‘shift’ their housing loans to banks/HFCs offering the best interest rates in the range of 8-9.5 percent.
The borrowers will save substantial interest components and avoid pre-closure charges with their existing bank/HFCs – as directed by the RBI/National Housing Bank.
The existing property insurance assigned to a bank or HFC can be transferred to the new ‘takeover’ institution, or the pro-rata premium will be refunded.
Certain lenders consider even’ top-up loans’ up to 20% of the takeover loan amount without additional conditions or collateral.
Risk-averse borrowers comfortable allocating a fixed amount of their salary/ business income towards the EMIs can opt for a ‘fixed rate with a yearly or 2-year reset’ product. This product has two advantages.
Further, the borrowers not only enjoy the current best interest rate but also have the mechanism of undergoing an ‘annual reset’, which gets adjusted based on the prevailing market conditions/interest rates at that juncture.
Many banks / HFCs are offering this loan product. This is perhaps the ‘golden time’ to opt for this scheme as the loan rates have peaked to the maximum and can only witness the reversal of the cycle by mid-2024.
Certain institutions offer ‘fixed rates’ for the entire loan tenure without the reset clauses. In such cases, borrowers must ensure a ‘truly fixed’ fixed rate for the entire loan tenure, clearly documented in the loan agreement without any ambiguity.
Otherwise, borrowers will also experience ‘rate fixing’. Such fixed loans will invariably be 1.5-2 percent higher than the lowest variable interest rate offered in the market.
Also, RBI Governor Shaktikanta Das urged banks/HFCs to immediately establish and put in place a ‘policy framework’ for the reset of interest rates on floating/variable interest rate loans to ensure transparency regarding the norms for resetting their existing home loans (including tenor / EMI), frequency of reset linked to external benchmarks such as repo rate / prime lending rate of HFCs, reset fees and options/guidelines for switching to fixed-rate loans.
Of course, this move envisages creating a level playing field in the ‘home loan market’ and preventing ‘loan’ poaching by banks/HFCs/NBFCs, thus ensuring customer protection.
Lastly by taking advantage of the above options, borrowers can carefully consider the most suitable, viable, and advantageous loan options.
(S Narendra is a Bengaluru-based Banker, Economist and guest columnist.)
(Edited by VVP Sharma)
