Since the August monetary policy review, the Reserve Bank of India (RBI) has announced two key steps that will benefit retail borrowers, particularly, home loan borrowers, who service longer tenure loans.
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It asked banks and non-banking finance companies (NBFC) should clearly communicate the impact of any rate change on the EMIs and loan tenure. Financial institutions have to give borrowers the choice to increase EMIs, extend the repayment period or opt for a combination of both.
Also Read | RBI issues detailed guidelines to reset floating rate loan EMI
This move comes after some borrowers saw their home loan tenures extending beyond 50 years due to rise in interest rates that followed RBI’s cumulative 250-bps hike since May 2022.
More recently, on September 13, the RBI directed banks to return property documents to borrowers within 30 days of loan settlement. If banks do not adhere to this timeline, they will have to pay borrowers Rs 5,000 per day for every day of delay.
These two measures will ensure that borrowers will not be saddled with prolonged repayment tenures and will be able to switch to other lenders to save on interest cost without worrying about delay in transfer of key property documents.
Also Read | SBI offers lower rates on new home loans: Should you refinance your loan?
To understand RBI’s stance and the impact on borrowers in detail, Moneycontrol spoke to Vipul Patel, Founder, MortgageWorld, a loan consultancy firm.
Here are the edited excerpts:
- This (communication of interest rate changes) is a welcome move by RBI that was long overdue. This measure applies to banks and NBFCS, and to all kind of retail loans.
- The move will ensure transparency. For instance, if the loan interest rate goes up, the bank will have to inform borrowers of the resultant extension in loan tenure and increase in EMIs.
- So, borrowers will know the exact numbers and will have the right to choose between extension in loan tenure or increase in EMIs.
- So far, banks would, by default, extend the loan tenures instead of increasing EMIs in case of rate cuts. This meant higher interest outgo over the repayment period.
- Now, borrowers who can afford to pay higher EMIs can decide to do so, instead of settling for longer tenure (and therefore, higher interest payable).
- While borrowers could specifically ask banks to increase EMIs even earlier, now the choices will be clearly laid out before them in the banks’ official communication.
- The second move pertains to return of property documents within 30 days of loan settlement. Banks are known to take over 5-7 weeks to return such documents, so this measure will ensure relief for borrowers.
- If you re paying an interest rate of over 9 percent on your home loan, approach your bank, show them interest rate offers from other banks (many offer 8.35-8.5 percent to new borrowers) and ask them to reduce your rate. If they refuse to, look at switching to a lender who offers cheaper interest rates.
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