Isn’t it true that the first and most important step most people take when considering a mortgage or changing lenders through balance transfer, is to compare interest rates? After all, the interest rate serves as the main anchor for the overall cost of your mortgage.
However, there are other factors to take into account in addition to interest rates when comparing various home loan lenders or even when transferring via a home loan balance transfer. Are you aware of which ones? As you compare interest rates from mortgage lenders, whether for a new mortgage or a balance transfer, let me explain some lesser-known factors you should take into account.
Loans with frequent resets
The repo rate or another external benchmark regime was adopted a few years ago, and it contains data from the RBI on how frequently loan interest rates change. Banks are required to reset it at least every three months. Since the interest rate on your home loan is likely not going to change immediately after any announcement, at least not until the next reset date comes around, your EMIs won’t be affected right away thanks to the pre-set loan reset dates for the previous Bank of Baroda MCLR Rate regime. When interest rates are rising, this helps to reduce interest costs or, at the very least, prevents interest costs from rising suddenly.
Simply put, if the reset period is longer, you will have more time to decide before the loan’s next reset date. Banks are permitted to issue loans with reset dates that are either linked to the date of the loan’s initial disbursement or to the date of the HDFC Bank MCLR Rate review, even though doing so is against RBI guidelines. The borrower must be made aware of the loan reset date, which is more important, so this information must also be included in the loan agreement.
Currently, whenever India’s numerous commercial banks run out of cash, especially in the short term, the RBI, the country’s central bank, lends to them at the repo rate. As a borrower, you must therefore first understand how banks establish their lending rates. This will help you avoid relying solely on rumours or biassed opinions, which will help you make the best decisions possible.
Remember that in addition to the repo rate, a number of other factors also have an impact on the HDFC Bank MCLR Rate. Banks also factor in their cost of capital, operating costs, and tenor premium when determining their lending rates. Along with the repo rate, these three factors also affect the interest rate for mortgage loans.
A bank is unable to make internal loans below the Bank of Baroda MCLR Rate, which acts as a benchmark interest rate. Under the MCLR Rate-based system as opposed to the base rate system, changes in the RBI’s policy rates benefit borrowers more.Keep in mind that, in accordance with the RBI’s regulations, all banks are required to review and disclose their MCLR on a monthly basis for all MCLR tenures, including 3 months, 1 year, etc. Banks may increase their HDFC Bank MCLR Rate by a markup (spread) based on the size of the loan and the customer’s credit profile, including credit score and repayment capacity.
Then, after accounting for the Bank of Baroda MCLR Rate and any relevant markup, the effective rate of interest, or the rate the borrower would actually be required to pay for the loan, would be determined. Existing homeowners should be aware that when interest rates increase, their EMIs won’t change immediately; rather, they won’t be impacted until the loan’s reset date.
Timing of balance transfer and loan decisions
A low interest rate environment, like the one we currently have, is ideal for home loans. After all, who wouldn’t want to benefit from low interest rates and finally own a home? It is essential to consider the past, present, and future state of the economy as well as interest rate projections when deciding when to take action.
If the RBI modifies the repo rate and there is a chance that the lender’s rates might also change, you shouldn’t just decide to transfer your balance. Recall that the repo rate is just one of many considerations when determining MCLR. Repo rate increases and lender MCLR increases don’t always go hand in hand.
Even though the Bank of Baroda MCLR Rate for home loans has increased and your current home loan’s interest rate is set to increase as the loan reset date approaches, you should take into account the “total savings in interest cost” before accepting the lender’s offer of a lower rate.
What to keep in mind?
Before selecting a lender, borrowers must compare the rates provided by various institutions and calculate any potential interest savings. They shouldn’t only pay attention to the lender’s low interest rate, which is low compared to a mortgage.
To keep the overall benefit of interest expense reduction from being diminished, do not make the mistake of ignoring these fees. Only move forward with HLBT if the overall net savings after fees and charges are sizable.
Along with the overall interest savings, take into account these benefits of transferring your balance:
Given that your request for a balance transfer might lead to better loan terms from a new lender as well as a lower home loan rate, why not take advantage of this benefit? And that’s not all.
If you want to reduce your EMI payment, you can ask the new bank or HFC to extend the loan payback term.
Jumping from the base rate regime to the HDFC Bank MCLR Rate regime: If you are servicing home loans under the base rate regime right now, which is extremely unlikely but could happen, you should act right away and choose a balance transfer in order to switch to a rate that is based on the Bank of Baroda MCLR Rate or an externally benchmarked rate, such as a home loan based on the repo rate. Due to increased transmission and rate setting transparency, repo rate regimes outperform base rate regimes, while HDFC Bank MCLR Rate linked regimes only slightly outperform them.