Most of us tend to look to the Reserve Bank of India’s (RBI) monetary policy review to make borrowing decisions. Be it corporates, small businesses, or borrowers, they all wait to see what stance the governor will take. Borrowers wait to see what the governor will do as his policy stance will determine the rates at which banks lend. Rather, how much your loan will cost.
However, it is time that borrowers, both existing and new, stop waiting for the monetary policy review to decide whether or not they should take a loan. Here is why.
RBI policy vs bank rates
Since August 2017, RBI has kept the repo rate unchanged at 6 percent. However, due to rising cost of funds of specific banks the marginal cost based lending rates (MCLR) had started increasing since March.
SBI has increased its MCLR across most maturities including its 1-year MCLR to 8.15 percent from 7.95 percent. Others like ICICI Bank and Punjab National Bank have raised their rates by 15 basis points. More banks may raise rates. A hike in MCLR means that your loans will get dearer since your equated monthly instalments (EMIs) will increase.
As things stand today, the interest rate appears to either remain stagnant or there exists a remote possibility for them to move up in the near term. Unless liquidity in the system improves and inflation is well under RBI’s target, home loan borrowers, both existing and new, will have to make do with a high interest rate regime.
“In the current interest rate cycle, we have touched the lowest level and it will come as no surprise if the cycle turns. Against this background, the impetus for stimulating housing demand does not lie on interest rate alone but on other reforms and steps taken by various stakeholders. Measures such as implementation of RERA in true letter and spirit, palatable payment plans for home buyers and relatively cheaper house prices are some of the critical determinants to revive the real estate sector. Until such time the benefits of these measures percolate across markets, the sector will continue to reel under pressure,” says Shishir Baijal, Chairman & Managing Director, Knight Frank India.
Therefore, new home loan borrowers who have zeroed in on a property should go ahead and take the loan instead of waiting for a cue from the RBI. The existing home loan takers, with loans linked to MCLR, may, however, not witness any change in EMIs until the bank’s MCLR changes, which depends on repo rate, among other factors.
Here are three important things to know about MCLR while taking a loan.
a) What are they?
All bank loans, including home loans, taken after April 1, 2016, are linked to a bank’s MCLR and any rise in it will push the home loan interest rate higher and vice versa. At a home loan rate of 8.4 percent, the EMI on a Rs 1 lakh loan for 15 years comes to Rs 979. If the rate is increased by 100 basis points (or 1 percent), the EMI will go up to Rs 1038 — a difference of Rs 59 or about 6 percent increase.
Banks publish overnight, one month, three months, six months, one year, two years, three years MCLR rates each month. Home loans are typically linked to 6 or 12-month MCLR of banks. They can either be fixed or a floating home loan. In a falling interest rate scenario, it helps to choose the latter, but potential borrowers may benefit out of the former if the rate cycle turns.
b) MCLR and mark-ups
Banks, however, may or may not lend at MCLR. They may ask for a spread or a mark-up or a margin. The actual home loan interest rate can be equal to the MCLR or have a ‘mark-up’ or ‘spread’, but can never be lower than the MCLR. Adhil Shetty, CEO and Co-founder, BankBazaar.com, informs, “The usual mark-up is in the range of 0.25-0.5 per cent, though it may increase if the credit profile of the borrower is shaky. There may even be select offers where the banks waive off the spread. Every bank has the right to adopt its own policy on deciding the components of its spread.”
c) Reset period makes floating rate fixed for a year
In the base rate era, when RBI reduced the policy rate, the expectation for a home loan rate cut emerged for both existing and new borrowers. There was no reset period in it. Home loans on floating interest rates were expected to move in tandem with policy rates.
However, in MCLR, the home loan interest rate gets re-priced periodically. As per RBI rules, “the periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract”
Most banks, however, offer home loans linked to their one-year MCLR which is reset yearly. So, if one has taken a home loan in May 2018 and the RBI cuts repo rate in October 2018, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in May 2019 only. In effect, there is a waiting period (usually a year) for the borrowers before they see an impact on their equated monthly instalments (EMIs).