The key to a successful home loan journey lies in the economy at which you service the debt.With the economy, it is referred to low-interest rates on a loan. When the interest rate is higher, the flow from your pocket will be that much more and vice-versa. And since it is about the home loan, which is taken for a longer period of 20-30 years, you need to be even more thoughtful as any negligence on the interest rate can make a deep hole in your pocket.
The selection of a lender with attractive interest rates can go a long way in making your stay at home comfortable and enjoyable.
Types of Interest Rates:
Home loan interest rates are offered on both floating and fixed basis, with the former being the most preferred one. Because it gives you the chance to leverage on the favorable market conditions to reduce the cost of your borrowing.
However, depending upon the repo rate changes, the interest rate on a floating rate home loan can either go up or down. If you can opt for a floating rate loan even at the expense of upside interest rate risks in the case of adverse condition, you would more or less emerge as a winner in the long-term. But for those who are unwilling to take the risk, fixed rate home loan is the way forward as the interest rate here will remain the same in the entire loan tenure, which means a fixed amount of EMI will be payable each month.
Interest Rate Changes in Response to MCLR Variation:
The conception of Marginal Cost of Lending Rate (MCLR) is attributable to the inadequate response to the cut in repo rate, the rate at which the commercial banks borrow from the Reserve Bank of India (RBI), by the central bank.
When the repo rate reduces, the banks receive cheaper loans from the RBI and vice-versa. The RBI had cut repo rate by 150 basis points (100 basis points= 1%) from Jan 2015 to April 2016. Surprisingly, the banks slashed their lending rates to just 60-70 basis points during the period, not even half of the benefit transmission to the borrowers.
So, in order to ensure effective transmission of rate cut benefits to the borrowers, the MCLR mechanism came to the fore and is applicable to floating rate home loans disbursed on or after 1st April 2016. Loans before the said date come under base rate regime.
If you belong to the base rate and want to take advantage of the rate cuts, switch to MCLR. But there is a condition that once you shift to MCLR, you can’t get back to the base rate.
How is MCLR Calculated?
Based on the factors below, MCLR is calculated by commercial banks in India.
- Operating Expenses
- Cash Reserve Ratio
- Tenor Premium
- Marginal Cost of Funds
The good thing about MCLR is the equated change in the effective lending rate of the lender. Nowadays, when the RBI cuts repo rate, the banks do make a change in their MCLR, decreasing your borrowing cost.
Home Loan Interest Rates of Major Lenders:
State Bank of India (SBI)- 9.10%-9.60% p.a. (women) – 9.15%-9.65% p.a. (others)
HDFC Bank- 9.15%-9.75% p.a. (women) – 9.20%-9.80% p.a. (others)
ICICI Bank- 9.15%-9.45% p.a. (women) – 9.20%-9.50% p.a. (others)
Axis Bank- 9.35%-9.45% p.a. (floating) – 11.75% p.a. (fixed)
Punjab National Bank (PNB)- 9.30%-11% p.a.(floating) – 9.25%-11.25%p.a.(fixed)
Bank of Baroda (BoB)- 9.05%-9.55% p.a.