MCLR, margin and reduction in home loan rates: A Saga
It is better to do the home work before signing above the dotted line. Home loans being large and long term liability it makes all the more important to understand what matters.
Fluctuation in rate of interest on home loan is one of the most complex things today. Many home loan borrowers find it difficult to decide on their home loan needs – be it choosing the right product or switching to another bank. Here, I am clearing some matters which are commonly not understood by the borrowers by and large. If you follow these six rules while deciding, chances are narrow that you will miss a good deal.
Rule no. 1: Do not jump at the sight of the cheapest rate of interest.
At the cost of repetition, cheapest can't be the best. Ranjan Mahato, a VP with a large media house was buying a Rs 12 crore home in Mumbai and was in requirement for a Rs 8 crore loan. He approached a PSU lender and it took him two and a half months to get the loan approved. He was prepared for this and was okay with it too. After all, the sellers are quiet co-operative these days, post demonetisation, and he took the loan disbursal on 28th Dec '16, only to find that bank reducing their MCLR by 60 bps in the very next week and felt elated with his choice of lender.
After a month, when his rate still remained the same, he called the lender only to get a response that his rate is linked with a 12-month MCLR and won't change till the next year, i.e., 2018.
Rule no. 2: Understand what your loan rate is pegged with.
If you have borrowed before April 2016, your loan will not be linked with MCLR and it will be either with base rate or even may be with Prime lending rate, if it's an old one.
Rajesh Srivastava took home loan at 8.25% in 2006 and it kept increasing soon after and touched a high of 13.75%. Right now, he's at 13% and still wondering what went wrong. His loan is tied with PLR. If you are with an NBFC, you don't even have a choice to shift to MCLR, since they are not banks and not regulated by RBI.
Rule no. 3: Study the previous track of the lender you choose.
This is not easy unless you are following the lenders for at least 3-5 years (which is most unlikely for a common man to do). There is no research available online either. If you find a mortgage broker who is seasoned and can help you with the data, you will see that the myth people carry in mind that PSU lenders reduce rates frequently and all MNC lenders are static, is completely erroneous.
Rule no. 4: A 'too-good-to-believe' deal may have hidden agenda.
Lenders have overdraft loans. Many affluent and cash-rich borrowers love this product. But, there will be small nicks in each one of them. The worst of all is - not having a calculator and using an excel sheet to do the math. Then mandatory minimum balance to be maintained or being charged an annual fee for maintaining high balance in that account are all in fine prints. Even your bank relationship manager may not know or surely can pretend not knowing about it.
Low rates of interest can be pegged with conditions like
(1) mandatory life insurance purchase
(2) credit score appraisal
(3) lock-in period
(4) agent subvention, which is not given or recognised by the bank/lender, hence unofficial
(5) agent's fee reduction by the lender to pass on some rate benefit to you, which can lead to a controversy if the agent fails to acknowledge later
(6) a temporary deal for short period where the rate increases later
(7) a step-up deal to accommodate the business today, but costs the borrower high
Rule no. 5: Please do not have fascination for low margin. It doesn't help.
Sahil Mohammed took home loan from a private lender one year ago at zero margin and the lender did not reduce MCLR for flat one year! All his friends are at least 50bps lower than him today, even if their lenders offered a 80 bps margin. One bps is one basis point which is hundredth part of one percentage point.
Rule no. 6: It's time to engage a mortgage broker and not do shopping on your own.
We used to hear 10 years ago-"I want to deal directly with a bank." which is reduced to great extent now. People do not have time to chase for file status or study the market. With more than 35-40 lenders competing in the market, where will you have the bandwidth to fetch data and compare things for yourself? It doesn't cost you a dime to have a professional taking care of your home loan transaction, so go for it!
Hope the tips helps you decide wisely.
The writer is founder of RetailLending.com