Home / Money / Personal Finance /  Don’t just consider the interest rates when taking a home loan

Interest rates on home loans have been falling ever since the lockdown, with the Reserve Bank of India (RBI) opting for deeper cuts in the policy rates to revive demand and economic activity that has taken a beating due to covid-19. In its last monetary policy meeting, the central bank reduced the repo and reverse rates by 40 basis points (bps) each to 4% and 3.35%, respectively. One bps is one-hundredth of a percentage point.

New customers can now get home loans at much lower rates than what was available earlier. “The sub-7% is the lowest interest rate on floating home loan in the last 15 years," said Gaurav Gupta, CEO, Myloancare, a marketplace for loans and credit cards.

Graphic: Mint
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Graphic: Mint

While interest rates are one of the key factors borrowers look at when choosing a lender, it’s important to consider some other aspects too. In a falling interest rate scenario, existing borrowers may feel stuck with higher rates but there may be a way out for them too. Read on to know more.

Falling rates

From 1 July, State Bank of India (SBI) is offering home loans starting at 6.95% per annum. Other public sector banks (PSBs), including Union Bank of India, Bank of India, Central Bank of India and Bank of Baroda, have been offering home loans from 6.70% or 6.85% onwards.

The actual rates vary depending on the loan amount and profile of the borrower. For salaried borrowers at SBI, the interest rate is 7% for loans up to 30 lakh. For loans between 30 lakh and 75 lakh, it’s 7.25% and 7.35% for loans above 75 lakh.

In the past, interest rates of private and government lenders have been similar. “But since the lockdown started, some private lenders have not been aggressive as the transactions are slow. They would keep the rates competitive once the transactions pick up," said Pankaj Bansal, vice-president and head, key account management, Bankbazaar, a marketplace for financial products.

For salaried borrowers, home loans from ICICI Bank starts at 7.45% (for up to 35 lakh) and go up to 8.45% (for loans above 75 lakh), according to its website. Axis Bank’s home loan rates start at 7.75% and Kotak Mahindra Bank offers it from 7.35% onwards.

New borrowers

Need to look at eligibility and EMIS: Cheaper rates from PSBs can help borrowers to either reduce the equated monthly instalments (EMIs) or get better eligibility. Assume a borrower takes a 25 lakh loan from SBI for 20 years and a private lender is charging a 50 bps higher rate. The EMI for the loan from SBI at 6.95% will be 19,308 and from the private lender, it would be 20,064 . The total interest outgo over 20 years will be higher by 1,81,429 in the case of the private lender.

A lower interest rate also means higher eligibility for the borrower. A person earning 45,000 would be eligible for a loan of 25.23 lakh at an interest rate of 7.45%. If the interest rate drops by 50 bps, the person’s eligibility could increase by almost 1 lakh, provided all other factor remain the same.

The eligibility criteria, however, differs from one lending institution to another and there are many other factors that are taken into consideration.

Need to look beyond rates: Different borrowers have different requirements and they should choose the lender accordingly.

Lower interest rates can help you save. “But usually, lenders that offer cheapest rates also have more stringent evaluation and eligibility criteria," said Ratan Chaudhary, head of home loans,

Banks offering cheaper rates can offer loans to borrowers with a high credit score or could offer a lower amount than other lenders. In such cases, borrowers may even need to look at non-banking financial companies (NBFCs) that may have higher rates.

Many PSBs have differential rates depending on the loan amount. The lower rates are usually for loan amounts below 30 lakh. The higher is for those looking for loans above 75 lakh. But many private lenders don’t offer different rates based on the loan amount. Borrowers seeking a higher loan amount can, therefore, look at private banks that disburse loans faster and may offer better services.

Then there are borrowers who may need a loan urgently. “PSBs, typically, have a higher turnaround time. If all the papers are in place, private lenders can offer a loan within two weeks. There are some, which can even offer a loan within seven working days, provided all the documentation is in place," said Bansal.

Existing borrowers

Almost all banks have passed the benefit of RBI’s repo rate reduction to their existing borrowers. But if you are still on marginal cost of funds-based lending rate (MCLR), your rates would change when interest rates come up for a reset. Interest rates on home loans benchmarked to MCLR typically have either a quarterly or annual reset clause.

According to intermediaries, it’s best for customers on MCLR to shift to repo-linked loans. “The interest rates on MCLR-linked loans depend on a bank’s cost of funds. It’s an internal criterion that a retail borrower cannot guess. It’s, therefore, best to shift to repo rate-linked loans," said Chaudhary.

If the rates on your home loan is up for a reset in the next four to six weeks, you can take the benefit and then shift, he added.

RBI has directed banks to charge a nominal fee from borrowers if they ask to switch loans from MCLR to an external benchmark.

Don’t just go by rates alone when taking a home loan. Select a lender based on your needs. If you are already servicing a loan which is on MCLR, it’s time you switch to a more transparent repo rate-linked loan.

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