Tue. Dec 1st, 2020

Know Whether you Should Refinance an MCLR Home Loan or Not

With a vision to revive the Indian economy, the Reserve Bank of India has announced

With a vision to revive the Indian economy, the Reserve Bank of India has announced certain policy changes over the past few years. It also instructed all financing organisations to link their loans to the new external benchmark lending rate, i.e., Repo Linked Lending Rate (RLLR).

Attuning to these latest developments, refinancing your existing MCLR-based home loan for interest rates that are more transparent and receptive to changes in the key policy rates indeed makes sense.

However, the total cost of borrowing, interest rate, etc. are some crucial factors to consider before opting for a home loan transfer.

  • As per the RBI’s monetary policy, repo rates remained unchanged at 4% as of October 2020.
  • Since 2019 beginning, RBI has slashed repo rates by 250 bps, a dip that is potent enough to bring a remarkable difference in interest calculation if transmitted fairly and in time.

Decoding the vital terms briefly

  1. Refinancing

Refinancing signifies transferring your outstanding housing loan amount to a new lender for better rates, features and terms. Once the formalities of home loan transfer are completed, the old loan gets cleared off while the outstanding balance is shifted to the new lender, with the EMI payment liability created towards the latter. Before opting for it, checking out a few tips for refinancing your home loan can be a smart step forward.

  • MCLR or Marginal Cost of Funds based Lending Rate

Introduced on 1st April 2016, Marginal Cost of Funds based Lending Rate is an internal benchmark for deciding a retail loan’s rate of interest. It thus creates a threshold so that financier lends money to any borrower below this minimum rate. Further, this rate is reset periodically, and lenders consider 4 major components to calculate MCLR rates, including:

  1. CRR or Cash Reserve Ratio
  2. Marginal Cost of Funds
  3. Operational Costs
  4. Tenure Premium

Post these considerations, the retail lending rate for an MCLR-linked home loan is determined only after the lender adds a margin or spread depending on the loan amount, borrower’s credit profile, tenure, and other eligibility factors.

  • RLLR

Repo Linked Lending Rate, the newest introduction announced by the RBI, is an external benchmark linked to the key policy rate or repo rate. The key rate, along with the margin/spread, forms the RLLR.

While the RBI reviews its policy rates periodically, lenders fix the spread which remains the same for every eligible customer. However, RBI also permits them to impose a risk premium on home loans based on the risk profile of a borrower. As per its circular, home loan interest rates are linked to this external benchmark now.

When MCLR was launched in April 2016, its objective was to provide repo rate benefits to customers overcoming the base rate limitations. Lenders, however, delayed passing on those benefits which compelled RBI to introduce RLLR in October 2019.

  • Since 2019, housing loans have witnessed record-low rates, starting from 7% or below.

Considering the major change in how loan interest rates are determined today, existing borrowers can opt for home loan refinancing to enjoy decreasing repo rate benefits early on.

Should you plan for housing loan refinancing now – Fact check

Home loan refinancing calls for an evaluative study of:

  1. Housing loan amount.
  2. CIBIL score of the applicant.
  3. Balance transfer fees.
  4. Remaining tenure.
  5. Difference between interest rates from the two lenders, etc.

In the current scenario, home loan transfer can be an effective move, but borrowers must also remember that interest rates may shoot up if RBI increases its repo rate later. A careful assessment of the right choice enables you to bring down the overall cost of the loan, pay reduced EMIs, and lessen the total number of EMIs payable.

Additional benefits of a balance transfer facility

Besides the benefits mentioned above, a balance transfer facility allows borrowers to avail a high-value top-up loan against minimum documentation. Leading housing finance companies provide these loans of up to Rs.50 lakh for various additional purposes. Nevertheless, you must make sure to know everything about top-up advances on home loan balance transfer before opting for one.

You can follow the online application procedure to apply for home loan transfer. Prominent HFCs in India additionally bring pre-approved offers, making the application process less complicated while helping save time. Eligible borrowers can avail pre-approved offers on home loans, loans against property, and various financial products. To check your pre-approved offer, provide a few details online.

For precise evaluation, use a home loan balance transfer calculator to compute your total savings, top-up financing and new loan amounts you are eligible for. This hassle-free online tool requires some necessary details like the existing lender, loan starting date, and property location for precise calculation.

How much can you save from refinancing?

Let’s take an example to understand how you can save from MCLR-based home loan transfer.

An individual borrowed a housing loan of Rs.50 lakh for a repayment tenure of 20 years. The existing HFC currently offers 8.15% as a one-year MCLR rate while it is 7.80% as an RLLR rate offered by the new lender.

  • In case of MCLR-linked loan, the EMIs stand at Rs.42,290 per month. Whereas, in RLLR-linked loan, EMIs stand at Rs.41,202 every month.
  • In MCLR-linked home loan, the total interest amount is Rs.3,64,200 while the same is Rs.3,48,248 under RLLR-linked loans.

To further clarify, make sure to know about MCLR rates and their effects on loans first.

Repo-rate linked housing loans are more transparent, improve liquidity situations, and ensure faster transmission of the RBI’s repo rate changes.

Before transferring from MCLR to RLLR, however, make sure interest rates for the latter are comparatively lower than the former. Better avoid switching if an HFC’s spread is higher despite a lower RLLR. This shall reduce your total savings. An MCLR home loan transfer proves profitable when your principal outstanding is sizeable, and the difference between interest rates is only 20 to 25 bps.

Reference links

https://www.myloancare.in/bank-base-rates-plr-india/
https://www.financialexpress.com/money/how-to-decide-about-refinancing-an-mclr-home-loan-an-in-depth-analysis/2088903/
https://www.financialexpress.com/money/should-you-move-to-an-rllr-home-loan-from-a-blr-or-mclr-loan/2058393/