Whenever the news of RBI’s MPC meeting starts making rounds, most borrowers, especially those serving home loans, eagerly await the announcement thinking that it would have an immediate impact on their loan EMIs. But that’s not necessarily true. To bring more clarity regarding this process and what actions Bank of Baroda home loan decisions borrowers must take, we explain to you why rate changes are important but shouldn’t solely influence your home loan decisions:
Role of repo rate in bank’s lending rate
Repo rate is the rate at which the Reserve Bank of India (RBI) lends to various commercial banks of the country whenever the banks face a shortage of funds. Borrowers need to first understand how banks set their lending rates. Repo rate is not the sole factor to determine a bank’s MCLR. Besides this, banks consider their cost of funds, operating cost and tenor premium while setting their lending rates. These three factors, along with the repo rate, together affect the lending rate of the bank.
With effect from 1st October 2019, upon RBI’s announcement to make it mandatory for banks to link floating rate home loans to an external benchmark, most banks, including Bank of Baroda home loan, have opted to link them to the repo rate. Hence, the repo rate’s role in home loan decisions for both new and existing borrowers has immensely grown and become crucial. Remember that banks do tend to levy a premium over and above this repo rate when pricing their home loan rates, depending upon the applicant’s credit profile and bank’s credit risk assessment.
For older borrowers serving MCLR based Bank of Baroda home loan interest rates, checking the MCLR of their bank remains vital. MCLR is the internal benchmark rate of interest below which a bank cannot lend. The MCLR based system is more transparent than the base rate system and offers higher transmission of benefits to borrowers on account of changes in RBI’s policy rates. Also, the RBI has mandated all banks to review and publish their MCLR every month, for all tenures, ranging from overnight MCLR to one year MCLR, or any other longer maturity MCLR, if any.
A mark up (spread) is also usually levied over the Bank of Baroda home loan interest rate based on MCLR, which generally depends on factors such as loan amount involved and customer’s credit profile. So, the effective rate of interest, i.e. the actual rate of interest the borrower would have to pay for the loan, would be determined after taking into consideration the MCLR plus mark up, if any. In rising rate regimes, it is vital for existing borrowers to remember that their existing EMIs won’t be affected immediately, but only upon the arrival of the loan’s reset date.
Loan reset frequency/period
The presence of pre-set loan reset dates in the MCLR regime ensures that borrowers’ EMIs do not get affected immediately and remain unchanged till the next reset date arrives, despite any change in the bank’s lending rates during the interim period. This assists in reducing the borrower’s interest cost in a rising interest rate regime, especially if the borrower has opted for a longer reset period. A longer reset period also provides the borrower with more time to decide upon the next course of action before the next reset date arrives. When should you opt for a balance transfer?
Bank of Baroda home loan borrowers must act with great prudence before blindly opting for balance transfer whenever RBI changes the repo rate. Since repo rate is one of the factors and not the sole factor while computing final lending rates, an increase in repo rate won’t necessarily imply a rise in the Bank of Baroda home loan interest rate.
How to calculate overall savings in overall interest cost?
One of the most important reasons for many home loan borrowers to opt for the balance transfer facility is to pull down their overall interest payout on the outstanding loan amount. But instead of blindly going for the lender offering a lower interest rate, borrowers must make sure they compare the rate offered by other lenders as well and find out the potential savings in interest cost upon transferring the loan to the chosen lender.
Before you apply for a balance transfer for the Bank of Baroda home loan, take note of the associated charges, if any. The new lender generally considers your balance transfer request as a fresh/new loan application and therefore may levy certain charges such as processing fees, administrative charges etc. Make sure you do not ignore these charges, as doing so may reduce the overall benefit of interest cost savings. Go ahead only if the overall net savings are substantial, after taking into consideration such fees/charges. If not, consider continuing with your existing lender and try to negotiate for better rates and services.
Apart from overall interest saving, below mentioned are the benefits of balance transfer:
Better and higher loan features with a new lender- Since your Bank of Baroda home loan balance transfer request is considered as a fresh loan application by the new lender, the terms and conditions would also vary. If the borrower wants to reduce their EMI outgo, he/she can request the new lender to extend the loan tenure. Moreover, in case the borrower requires a higher loan amount than the current outstanding amount, in order to carry out repairs, renovations etc., on their home property, they can even request the lender to grant it.
Availing of top-up loans along with balance transfer-A number of lenders have been offering top-up home loans upon receiving your balance transfer request. The top-up amount would be over and above your existing home loan’s outstanding amount. There is no restriction on the end-user of this top-up loan’s proceeds. This top-up can also be utilized to consolidate your debt since their interest rates are usually lower than most types of loans. Borrowers whose existing lender has rejected their home loan top up request can opt for a balance transfer facility and choose the lender who can provide top-up along with balance transfer.
Switching from old interest rate regime to new external benchmark linked regime: Existing home loan borrowers currently serving loans under the old MCLR rate regime should opt for balance transfer and switch to external benchmark based home loan rate regime, irrespective of the changes in the policy rates or existing banks’ home loan rates. External benchmarked Bank of Baroda home loan decisions interest rate holds the edge over MCLR based loans on many fronts, especially in the form of more transparent rate-setting and transmission of rate changes.