Your EMI will go up as banks increase home loan rates

Mumbai: Ahead of the Reserve Bank of India’s (RBI) bi-monthly monetary policy announcement, top banks and housing finance companies, including State Bank of India (SBI), ICICI Bank Ltd, Punjab National Bank and Housing Development Finance Company (HDFC) have increased their marginal cost of funds-based lending rate (MCLR) and retail prime lending rate (RPLR) by 5-10 basis points. MCLR is the benchmark lending rate used to lend by banks and RPLR is used by non-banking finance companies. One basis point is one-hundredth of a percentage point (bps).

Rising interest rate regime

SBI, the country’s largest lender, increased its one-year MCLR from 8.45% to 8.50%. For an amount of ₹ 30 lakh, the bank will now provide home loan at 8.70-8.85%, up from 8.65%-8.80%.

ICICI Bank Ltd has increased its six-month MCLR from 8.50% to 8.60% and one-year MCLR to 8.65% from 8.55%. The bank offers home loan on both six-month and one-year MCLR. The spread on the home loan from the bank ranges between 30-90 bps depending on the type of loan, type of borrower and the loan amount. A spread is a margin that is above MCLR, which adds up to your overall home loan amount.

HDFC is providing home loan at 8.80-8.85% for loan amount up to ₹ 30 lakh, up from 8.70-8.75%.

In the last two policy reviews, the central bank increased repo rate by 25 bps each. According to banking analysts, RBI is likely to increase the rate during the Friday review as well. “We expect a 25 bps hike in repo rate in October policy and it may not be the last in the financial year. We rule out a hike of 50 bps, as it may spook the market. However, there is an outside probability of change in neutral stance too, as three successive rate hikes, with a neutral stance could contradict RBI’s message,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, in a note.

What should you do?

If you are planning to take a home loan, you need to know that there are two types of loan options—fixed rate loan and floating rate loan. In a fixed rate loan, the bank gives you a fixed rate for a particular tenure. In case of floating rate loan, the interest rate will change depending on the interest rate cycle. Financial planners suggest that one should opt for floating rate loans.

“No one can time the interest rates while taking a home loan. Moreover, housing loan lasts for a longer duration loan—over 20-year period. Hence, since there will be changing interest rate cycles, it is better to have a floating rate,” said Suresh Sadagopan, a Mumbai-based financial planner.

“Again, if you look at a typical home loan borrower, most of them end up prepaying the loan. Hence, there is no need to block it at a fixed rate loan,” he added.

Remember that usually fixed rate loans are priced higher than home loan rates. Also, when it comes to prepayment, you may have to pay a prepayment penalty for a fixed rate loan. In case of floating rate loans, there is no prepayment penalty.

Besides the interest rate, you also need look at other charges when you opt for a home loan.

Home loans usually have charges such as processing fee, administrative cost and franking charges. You need to factor in these costs and the interest rate before taking a loan.

As a borrower, you can also negotiate with a bank or housing finance company to waive off the charges if you have a good credit score. If you are an existing home loan borrower, you need to check your interest rate. If it is too high, try to convert into a lower rate through balance transfer.

“It will make sense only if the new interest rate is lower by over 75 bps. However, if your home loan rate difference is say around 100 bps, in a competitive scenario, these do get corrected. If you are looking to do a balance transfer of your home loan, other than interest rate also check for the charges,” said Sadagopan.

Usually balance transfer works if your remaining home loan tenure is over 10 years.