Loan growth, referring to year-over-year change of commercial financial institutions’ credit to economy ratio, has touched an all time high for the last few years in India. Currently at the end of October 2020, this loan growth is estimated at around 8.90%. With increase in home loan applications owing to several government initiatives, this reform in interest rates has brought in quite a few fundamental changes.
While it is important to understand these reforms and their benefits, other methods of reducing housing loan interest rates are relevant and crucial as well. While these other methods do not necessarily avail the benefits of the new rate related norms implemented by RBI, they still effectively cut down on EMI bills. Consequently, existing as well as potential borrowers should understand all these methods in sufficient details so that they can repay their home loan with least financial burden.
Understanding the new rates: Repo rate and its benefits
Evolving over different home loan interest rate regulations from RBI, the latest inclusion was MCLR or Marginal Cost of fund based Lending Rate. RBI tried to enforce prompt rate cuts on existing tariffs offered by financial institutions with this norm. A persistent problem with enforcing the change in rates has always been that of enforcing reductions, while rises were typically implemented at the earliest.
Under such circumstances, the repo rate was introduced by RBI to be put in effect since August 7th, 2019. It is crucial that potential borrowers understand the RBI repo rate cut and what to expect from this announcement to avail of maximum benefits offered by it. Under this guideline, financial institutions fix their rate of interest-based on the repo rate issued by RBI along with a value that is under their control.
With this new directive, borrowers can expect faster change in their floating interest rates on home loans. Using a loan EMI calculator, they can even calculate the difference in monthly repayment based on MCLR and repo rates. It is also vital for customers to note that with a faster change in rates of interest, rise in it can also be expected like its cuts.
Other options to maximise benefits for Home Loan under new interest rates
While the new interest rate directives offer customers with prompt rate cuts as per RBI guidelines, the below-mentioned methods allow them to opt for better home loan interest rates on existing loan offers.
- Balance transfer: Customers can simply transfer their loan balance to a financial institution that offers lower interest rates. They should be cautious to learn everything they need to know about home loan balance transfer before applying for it. This allows them to avail lesser rates of interest, thereby saving on the total amount paid by them.
- Prepayment: This allows customers to repay a portion of the complete loan amount ahead of time. While most financial institutions offer this facility without any extra charge, a nominal charge might be levied as a penalty to close the line of credit ahead of its tenor. Effectively, this allows customers to save on many months of interest.
- Changing the interest rate scheme: Borrowers can shift from flexible rates to fixed rates to avail lower home loan interest rates. Interestingly, they cannot revert back in case there is a rate cut in the flexible interest rate and therefore they should weigh the odds before opting for this option.
Be it the application of home loans in India under the new interest rate directives, or transferring to a different financial institution; the application process for a home loan is typically very easy.
With the ease in application and fast disbursal, availing these loans is not difficult. Along with the reduction in interest rates, customers of these financial products should also look for tax savings. The Income Tax Department of India offers numerous home loan interest tax benefits which allow customers to save both on their principal amount as well as the interest paid.