Isn’t it true that most people compare interest rates as their first and most important step when thinking about getting a mortgage or switching lenders? After all, the main reason for the overall cost of your loan is the interest rate, right?
When comparing different home loan lenders or even when transferring via a home loan balance transfer, there are additional factors to consider in addition to interest rates. Do you know which ones? For a new mortgage or a balance transfer, you should compare the interest rates being offered by mortgage lenders. I’ll discuss some less well-known aspects you should consider.
Loans that reset frequently
Since it was put into place a few years ago, the repo rate or another external benchmark regime has included information from the RBI about how frequently loan interest rates change. It must be reset by banks at least every three months.
Your EMIs won’t be impacted right away thanks to the pre-set loan reset dates for the previous IndusInd Bank MCLR regime, as the interest rate on your home loan is probably not going to change right away after any announcement, at least not until the next reset date comes around. This helps to cut down on interest expenses or, at the very least, keeps them from rising suddenly during an increase in interest rates.
Simply put, you will have more time to make a decision before the loan’s next reset date if the reset period is longer. Even though it is against RBI regulations, banks are allowed 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 UCO Bank MCLR review. The loan reset date, which is more significant, must be disclosed to the borrower and must be included in the loan agreement.
Currently, the RBI, the nation’s central bank, lends to India’s numerous commercial banks at the repo rate whenever they run out of money, especially in the short term. Therefore, as a borrower, you must first comprehend how banks determine their lending rates. This will enable you to make the best decisions possible and prevent you from relying solely on rumours or unfavourable opinions.
Keep in mind that the IndusInd Bank MCLR is influenced by a variety of other factors in addition to the repo rate. When determining their lending rates, banks also take into account their cost of capital, operating expenses, and tenor premium. These three elements have an impact on the interest rate for mortgage loans in addition to the repo rate.
A bank is not permitted to lower the UCO Bank MCLR, which serves as a benchmark interest rate, when making internal loans. Changes in the RBI’s policy rates benefit borrowers more under the MCLR Rate-based system than they do under the base rate system.
Remember that all banks must review and disclose their MCLR on a monthly basis for all MCLR tenures, such as 3 months, 1 year, etc., in accordance with the regulations set forth by the RBI. The size of the loan and the customer’s credit profile, which includes the customer’s credit score and repayment capacity, may cause banks to increase their MCLR Rate (spread).
The effective rate of interest, or the rate the borrower would actually be required to pay for the loan, would then be calculated after taking into account the IndusInd Bank MCLR and any applicable markup. Existing homeowners should be aware that their EMIs won’t change immediately when interest rates rise; rather, they won’t be affected until the loan’s reset date.
Timing of decisions regarding balance transfers and mortgage loans
When interest rates are currently low, as they are right now, home loans perform best. Who wouldn’t want to take advantage of low interest rates and finally own a home, after all? When deciding when to act, it is essential to take the economy’s past, present, and potential future into account as well as projected interest rates.
You shouldn’t just choose to transfer your balance if the RBI modifies the repo rate and there’s a possibility that the lender’s rates might change as well. Keep in mind that there are numerous factors to take into account when calculating UCO Bank MCLR. Lender MCLR increases and repo rate increases don’t always take place simultaneously.
You should consider the “total savings in interest cost” before accepting the lender’s offer, even though the rate is lower than the MCLR. Your home loan’s interest rate has gone up and is likely to go up again as the loan reset date draws near.
Bear these things in mind before transferring your balance through HLBT
Borrowers must compare the rates offered by various institutions and determine any potential interest savings before choosing a lender. They should consider other factors in addition to the lender’s low interest rate—which is low in comparison to a mortgage—when making a decision.
Do not make the error of ignoring these fees in order to prevent the overall benefit of interest expense reduction from being reduced. If overall net savings after fees and charges are significant, only proceed with HLBT.
Consider these advantages of transferring your balance in addition to the overall interest savings:
A larger audience, enhanced loan features, and a new lender Why not take advantage of this benefit given that your request for a balance transfer might result in better loan terms in addition to a lower home loan rate? That’s not all, either.
You can ask the new bank or HFC to lengthen the loan payback term if you want to lower your EMI payment.
Changing from the base rate regime to the IndusInd Bank MCLR regime: If you are currently servicing home loans under the base rate regime, 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 MCLR Rate or an externally benchmarked rate, such as a home loan based on the repo rate. Due to improved transmission and rate setting transparency, repo rate regimes outperform base rate regimes, while UCO Bank MCLR rate linked regimes only slightly outperform them.