Home loan: Is this the time to swap your banker?

Satyam KumarLoanTapWe still do not know when your account will get credited with windfall gains from government actions on black money and corruption. But we can tell you with a certain degree of confidence that in a week from now, if you approach your home loan or mortgage loan firm, then they will sheepishly admit that home loan for new customers is far lower than the one of yours. Gotcha! You have caught them on wrong foot and they will be at loss of words to explain how it works.So, here we try to explain for in common man’s language.A day after Prime Minister Narendra Modi’s appeal to banks in the country to focus on making lives for the poor and middle classes better, largest PSU State Bank of India announced its decision to cut the benchmark lending rates across various maturities. The bank cut its marginal cost of funds-based lending rate (MCLR) across all tenors by 90 basis points (bps), the steepest cut in several years. The six-month MCLR is now 7.95% and the three-year rate stands at 8.15%. The decision was made possible due to large amount of cash deposited into banks thanks to the demonetization of high-value currency notes. Other public and private sector banks have also followed suit by announcing cuts in their MCLR. This has resulted in home loan rates touching six year low of 8.55%-8.65%. So, for example 1 year MCLR is 8% and SBI has kept home loan rate (floating) for loan amounts upto Rs 75 Lakh at 65 bps (100 basis point equal to 1%) above 1 year MCLR i. e. 8%+0.65%= 8.65% will be the interest rate offered to new customers. Practically this is lower than earlier offer of 9.15% by SBI. However, if you look into finer details the spread has been increased to 65 bps now. A spread is the difference between MCLR and Product Specific Lending Rate, i.e, margin that you must pay over the MCLR rate. For instance, State Bank of India, the country’s largest bank, has cut the interest rate on 1-year MCLR by 90 basis points (bps) to 8%. But it has increased the spread from 20-25 bps to 60-65 bps. So, effectively, the home loan rates have come down but banks margin on the new loan has increased. If you do plan to take a home loan, it will be advisable to check both the MCLR and the spread to know how your home loan will behave. MCLR has been in effect since April 2016. So, if you took a floating home loan after 1 April 2016, you are not likely to see an immediate impact. Most banks have a reset clause of 6 months to 1 year. For instance, if you took a loan linked to 1-year MCLR in August 2016, your loan rate will get reset only in August 2017. In a falling interest rate regime, you will benefit once you complete the loan cycle.Now, having heard this explanation you can still throw your weight around. The only reason behind this is there is no lock-in charges (foreclosure) in floating rate home loans. A portfolio shift to competition will be a big deterrent for banks, particularly in a quarter following sluggish growth. Loan growth was less than 6% in Q3 (December quarter).SBI is also offering a 2-year fixed rate home loan at 8.50-8.55% for amounts up to Rs 30 lakh. All this will most likely boost low-cost housing market in the medium and long term, and will in turn lead to more housing projects in and around the eight metropolitan cities of the country. However, investments in real estate may not yield the best possible returns just yet, with the sector still recovering from effects of demonetization. So, real estate investors should be advised to sit this one out and wait for the macro environment to stabilize.Many of the old home loan borrowers are on base rate. Base rate was the benchmark lending rate before MCLR came into effect and current base rates are higher than MCLR rates. Hence, old borrowers have not seen any relief in lending rates after the MCLR was implemented in April last year. SBI, for instance, last lowered its base rate in October 2015 to 9.3 per cent. SBI’s old borrowers continue to pay 9.55 per cent interest rate, based on the erstwhile base rate (9.3 per cent). Home loan borrowers taking loans post January 1 2017, will now be charged a much lower 8.65 per cent.There is expected to be a high growth in volume in terms of new loans with banks. Much of it is expected to be a result of loan balance transfers from one bank to another. Approximately 20-30% of the growth can be expected through migrations. This gives consumers the leverage to negotiate with their bankers for better rates, as banks will be trying to minimize the churn and hold on to as many customers as possible. However, to do a balance transfer, you must check the transfer cost, outstanding loan amount, tenor, and difference in the interest rates. If your outstanding amount is low and only a few years away, a balance transfer may not work because the transfer cost will nullify the benefit. Don’t go for short-term promotion offers—say, a fixed rate loan for 2 years—when you opt for a balance transfer.While increasing credit growth would benefit the economy – which is facing a disruption after the demonetization drive – and boost the growth for FY2017, analysts predict that the effects on the market would be visible only after the first two quarters. These rate cuts will no doubt appeal to home owners who are looking to buy a property as well as to those who are availing long-term housing loans, as they represent a more cost-efficient, long-term proposition. Those looking to buy property as an investment, however, might want to wait for some time before taking a housing loan and staking their capital on the real estate market.