3 lesser-known things to keep in mind when comparing home loan interest rates

Juliet D'cruz

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3 lesser-known things to keep in mind when comparing home loan interest rates

Whenever we think of taking an IIFL Home Loan or shifting existing to another lender, comparing the interest rates is the first and probably the only thing many people focus upon, isn’t it? After all, the interest rate is what is the primary anchor behind the total cost of your home loan. However, that’s where the catch is.

Yes, interest rates are a key parameter to compare numerous home loan lenders and even for switching through Canara Bank Home Loan balance transfer, but there are other aspects as well which you need to factor in. Wondering which ones? Let’s explain to you the lesser-known aspects to keep in mind when comparing interest rates of home loan lenders, whether for a new home loan or balance transfer. 

Frequency of loan reset period

In the repo rate or other external benchmark regime introduced about a couple of years back, loan interest rate frequency has been clearly specified by the RBI. Banks have been asked to reset it at least once every three months. And for the older MCLR regime, the presence of pre-set loan reset dates in the MCLR regime ensures that your EMIs are not immediately impacted as the IIFL home loan interest rate is likely to not change just after any such announcement, at least until the next reset date arrives. This helps you to lower or at least prevent a sudden rise in the interest cost in a rising interest rate regime. 

Simply put, the presence of a longer reset period provides you more time to decide the next course of action before the next reset date of the loan arrives. Even as per RBI, banks can offer loans with reset dates linked either to the date of the first disbursement of the home loan or to the date of MCLR’s review. What’s more important is that this needs to be notified in the loan agreement so that the borrower knows the loan reset date. Keep reading to know customer experience.

Present benchmarking regime of lender

India’s central bank, i.e. the RBI, lends to various commercial banks of the country at the Repo rate whenever the banks face a shortage of funds, especially for the short term. So, you, as a borrower, first need to understand how banks set their lending rates. This will assist you make the right decisions without blindly believing any hearsays or biased opinions. 

Remember, the repo rate is a vital but 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 IIFL home loan.

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As far as MCLR is concerned, it is an 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. 

It is pivotal to keep in mind that the RBI has mandated all banks to review and publish their MCLR per month, for all tenures of MCLR, like 3 month MCLR, 1 year MCLR etc. Banks can levy a markup (spread) over their MCLR, which usually depends on factors like loan amount and customer’s credit profile, including credit score and repayment capacity. 

Hence, 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 of Canara bank home loan to remember that their existing EMIs won’t be affected immediately, but only when the home loan’s reset date arrives.

Timing of home loan and balance transfer decisions

For home loans, the scenario, such as the present one involving low-interest rates, is ideal. After all, who doesn’t wish to fetch low-interest rates and realize their goal of owning a home? So, it’s important to check the timing of your decision by analyzing the present and expected economic scenario and interest rate expectations. 

As far as balance transfer is concerned, don’t just blindly opt for balance transfer whenever RBI changes the repo rate and an expected change in lender’s rates is knocking on the door. Remember, the repo rate is one of the factors and not the sole factor while computing MCLR, An increase in repo rate won’t necessarily imply a rise in lender’s MCLR.

Also, even if the MCLR for IIFL home loan has risen and your existing home loan’s interest rate is set to rise upon arrival of loan reset date, you need to evaluate the “overall savings in interest cost ” before finalizing the lender, providing a lower rate.

What to keep in mind when taking a balance transfer

Do not blindly zero in on the lender offering a lower interest rate than that of Canara bank home loan; 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 submit an application for a balance transfer, factor in the associated fees and charges, if any, the new lender generally considers your balance transfer request as a fresh home loan application, and hence can mostly levy fees or charges like loan processing fees, administrative charges, and so on. 

Never commit the mistake of ignoring these charges, as it can reduce the overall benefit of interest cost savings. Go ahead with HLBT only if the total net savings are substantial, after taking into consideration the levy of fees and charges. 

Besides the total interest saving, don’t overlook these below-mentioned benefits of balance transfer:

Brighter scope of better loan features with a new lender- As your request for balance transfer is capable of not just fetching you a lower rate through Canara bank home loan but even getting you better loan features, why not take avail this benefit? And that is not all. 

If you want to reduce your EMI amount, you can request the new bank or HFC to give an extension of the loan repayment tenure. 

Jumping from base rate system to MCLR regime: If you are currently serving home loans under the base rate regime, which is highly unlikely, but in case it is, you should act quickly opt for balance transfer and switch to MCLR based rate or external benchmarked ones like repo rate based Canara bank home loan. When compared to the base rate regime, MCLR linked regime is the slightly better regime, and the repo rate regime is even better due to higher transparency in transmission and rate-setting.

Taking a top-up loan facility along with balance transfer- It’s true that many banks and HFCs offer the facility of top-up home loans in addition to the balance transfer. This top-up amount would be over and above your existing home loan’s outstanding amount. There is no restriction on the end usage of the top-up amount from the IIFL home loan. 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.

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