There are numerous advantages associated with applying for a home loan. Investing in a property is one of the best methods of ensuring your long-term financial security. After all, the value of your property is going to appreciate significantly in the future. In an economy where inflation is rising constantly, it’s essential to safeguard your purchasing power. Hence, an increasing number of people are choosing to purchase houses in metros – all thanks to the easy availability of home loans. Managing your home loan properly could help you save a lot of money.
Many financial and non-banking financial companies (NBFCs) have announced significant cuts in home loan interest rates in the past. This was done to encourage customers into applying for home loans and avail its benefits. However, it is still unclear whether all the home buyers would be benefitted by the reduction in interest rates. Let’s discuss the same in the following paragraphs:
Experts point out that existing borrowers who have opted for a fixed interest rate, based on the base rate system and not on marginal fund costs (MCLR) when the interest rate was hovering around 10%, will not be benefitted by the cut in interest rates. This is because they’ll have to pay extra money as compared to the new home loan applicants.
Even current home purchasers, who have obtained their home loan under the funds-based lending rate framework can avail the benefits only after the reset date. It’s important to be cognisant of the fact that the reset date varies across different financial institutions. This generally implies that the customer has to pay higher interests till the reset date. New borrowers will be benefitted by these changes and will be eligible to receive a higher loan amount. It’s essential to note that your EMI is normally linked with your monthly income.
Who will benefit?
Again, individuals who have opted for their home loans under MCLR scheme after April 2016, will have their interest rates calculated during the reset period – implying that they’ll have to patiently wait until then. Customers with older loans can or will not be benefitted by the changes depending upon their unique circumstances. They may still be on the base rate regime with their interest rates either remaining constant or being marginally changed. In both the above-mentioned cases, borrowers will not be benefitted greatly and will generally end-up spending more on their loans.
However, borrowers under the MCLR scheme will be able to save money after the reset due to the reduced interest rates. They will have to wait for a few months until the reset is made. Even individuals with older loans can make significant savings. For example, if you have a home loan of Rs.50 lakhs for a period of 25 years with an interest rate of 9.2%, then your existing EMI would be approximately Rs. 42,646. Your total repayment amount would be around Rs.1.02 crore. In case your interest rate is reduced to 9.2%, then your total repayment amount would slide down to Rs.98 lakhs.
Is switching your loan to a new bank/financial institution necessary?
There is no straightforward answer to this question as context has to be taken into consideration. Experts recommend refinancing your credit if you have an older loan. Those who have opted for the base rate system should negotiate with their lender for switching to the MCLR system. Your provider would most likely oblige as they would want to retain you as a customer.
Now that you know the tricks of the trade, you can utilise this information to manage your home loan better.
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