Sukanya Kumar
Looks like the market has already bottomed out for home loan borrowers as lenders have started hiking up their MCLR in the past few months. The market was never so unpredictable as it is now. There are various reasons for this diversity and as a learned borrower, one must see through the magnifying glass to choose his lender carefully.
Gone are those days when borrowers used to find out the 'cheapest' rate of interest and there were few smart borrowers who negotiated a processing-fee waiver in addition to that - either with the bank or the loan agent.
1. Bank or NBFC: You may already know now that RBI has mandated all retail borrowers' loan rate to be attached to the bank's internal borrowing rate (MCLR) and publish it in their website every month. Two reasons for this, (i) Transparency to the borrower on fluctuation of his payable interest, and (ii) To make sure that the lender passes on the benefit of reduction in Repo and Reverse-Repo rates to the borrowers, which was not happening during Base rate regime. Unfortunately, NBFCs do not have to follow such guidelines and they are still operating on Sub-Prime lending. Their fluctuation of lending rate purely depends on the market competition and thus borrowers do not have clarity.
2. Margin from MCLR: The margin offered by the bank is of no true relevance for the borrower. Say you borrow from X bank at 8.50% rate and their MCLR is 8.25%; hence 25bps margin. Some Y lender will give you the same rate of 8.50%, at a zero margin, which means their MCLR is 8.50% too, but how does that make any difference for you? It is in more probability that the latter one will not reduce their MCLR soon. If they do, then only you will be lucky.
3. MCLR trend since inception: Recently a bank who was offering the lowest rate has increased their MCLR by 100 basis point (one percentage point) in last four months. You will never know the real strategy behind this and I can assure you that the bankers themselves are not privy to that knowledge. Only their stake-holders are. So, better be vigilant and look for a stable lender.
4. Monthly/Quarterly/Half-yearly/Annual Reset: When the rates were going down, then opting for a more-frequent correction was a better bait. Now, longer the reset period is better for you. For example, Citibank resets their borrowers' rate each month, which was a winner till rates started moving North.
5. Low ticket loan or High ticket: You will have more benefit if you are a borrower of less than Rs 25 lakh loan as a couple of banks do offer a 12 and 18 month reset. More banks are likely to follow to capture that market. However, the knowledge about this facility is not much understood by the borrowers of that bracket and needs education. High ticket loan do not have such options. A bank will offer you a fixed reset cycle while you borrow and mention it clearly on their offer letter.
6. Multiple home loans or consolidation: If you have purchased multiple homes under home loan expecting to save on more tax, it is already not a very good idea. In the current budget though the tax on property loan interest remain unchanged, each year it looks like it's just at the brim and a consolidation would be prudent. So, this fiscal year is for you to prepare for either this or that.
7. Overdraft or standard loan: Overdraft loan was introduced by Citibank and was followed by Standard Chartered and HSBC shortly. After some time, some PSU and private banks have also imbibed the product. But as a result, the product variants have increased and some of the features are not so borrower-friendly. Now, only an expert in all banks' overdraft product can guide you properly. Should you plan to buy the product, be sure to do more research than earlier, especially if you are opting for a new bank. Just do not rely on- "It's the same product as others, Sir/Ma'am."
8. Tenure (long/ short): We do not feel at ease if our residential home is under mortgage and we thrive to close that loan down as soon as possible without doing any math. We check with the bank whether we can get a five year loan instead of 20 and feel very happy if we get the grant. My suggestion is that you study your own financial planning carefully before committing to a higher EMI amount (the lesser the tenure, higher the EMI), as even if you opt for a longer tenure, you can pay up early without any penalty and be happy. Emotions ride very high when it is your 'home' which may not be a great financial decision.
Choosing a lender gets more critical and just having a myth hovering on your mind is no good anymore. You take counseling for your SIP which is a nominal amount, but seek no guidance before taking the largest loan of your life! Time you start looking out for mortgage broking houses in India.
(The writer is founder of RetailLending.com)
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