The central bank capitalized on some slow decision making from other banks and decided to introduce a new system of determining lending rates. It would be based on the marginal cost of borrowing. Under the new regulations, interest rates for different customers will be calculated according to the risk associated. All loans passed by banks have to be in accordance with the terms and conditions of MCLR.
While the new rate cuts will definitely be beneficial for new home-loan borrowers, it should not deter people who have borrowed previously. If you are in your loan tenure for residential plots in north Bangalore or office spaces in your favourite hill station, it’s no time to worry. The rate cut will reflect at a later period as opposed to having immediate effect. You should wait for your bank to reduce the rates or try and shift the loan to a different lender by paying the required fees.
Some of the factors which have been affected by this change of system:
Eligibility increase: A 50 basis point drop in interest rates for home loans for new borrowers should more or less guarantee an increase in eligibility. For example, a 20-year home loan for Rs 55 lakh could be given to someone earning Rs 1 lakh a month. Now for the same criteria, a loan worth Rs 58 lakh can be obtained.
Reduction in tenure: Whenever there is change in interest rates, banks change the tenure of the loan as compared to changing the equated monthly installments of customers. Existing home loan borrowers can naturally expect a reduction in tenure
Widening disparity: The differences in lending rates exists for all borrowers, especially the ones who have taken loans after the introduction of MCLR. A reduction in month-on-month MCLR does not necessitate a decrease in the lending rates. Under MCLR-based pricing, lending rates are reset at specific intervals which correspond to the MCLR tenure.
What effect does a changed MCLR have on home loans?
Under the new terms and conditions of MCLR, there will not be any change in the interest rate of home loans (every time there is a change in the MCLR). There is a reset clause that banks are allowed to have in the lending agreement, which fixes the period or date when the lending rate is changed for the borrower. The premium charged by a bank for a particular loan over and above the base rate or the MCLR is called the “spread”.
If there is no reset period restriction or if the reset period is over, borrowers who have borrowed under the current MCLR get a benefit. While the MCLR may have been reduced, the spread has been increased. It means that new borrowers will not get a home loan at the same rate as the reduced MCLR. The rate could, instead, be higher than what it would have been without an increased spread.
As borrowers seeking plots for sale in north Bangalore, south Bombay, east Kolkata and other parts of India are a mix of existing and future borrowers, this post can help clear the doubts on who is affected and who isn’t. Existing borrowers stand to benefit on account of their spreads not having changed under the latest rules and regulations. The spread will remain the same unless the borrowers have a reset clause and the reset duration is not over yet.