The interest rate on home loans is seeing a massive dip. Banks have lowered their rates to even less than 7% per annum for their new customers. However, it may be the case that the existing customers may have been paying the interest as per the old rate. There may be many reasons for this. Let’s find out why could you be paying a higher rate.
Types of loans
First, it is important to know whether your loan has a fixed rate of interest or a floating rate of interest or a hybrid interest rate. A fixed-rate of interest means that the interest rate on your loan will be fixed at the time of loan disbursal and remain the same throughout the term. The bank’s announcement of a change in interest rates does not affect your loan’s interest rate or EMI. The floating or variable rate of interest keeps on increasing or decreasing from time to time. In the case of hybrid loans, the interest rate remains fixed for the first few years, and later it turns into the floating-rate loan. So, by now you must have understood that the rate of interest of your loan will change if you have chosen a floating rate or when you get your loan converted into a floating rate loan.
Reset Date
Depending on your loan agreement, there is a reset date on which it is possible to change your loan’s interest rate. It does not matter how many times the bank has announced changes in the interest rates in the meantime. According to your loan agreement, the reset date can be three months, six months, or even 12 months. For example, your loan reset date is 12 months, and your bank reduces the interest rate when your loan is just three months old. Then you will have to wait for another nine months to get the benefit of the reduced rate.
Lending Rate System
Government or Non-government banks and housing finance companies such as HDFC or LIC Housing Finance Company provide home loans to buy or construct a house. These financial institutions have different methods of determining interest rates. Housing finance companies follow Retail Prime Lending Rate (RPLR) system; while banks follow MCLR or Repo-Linked Lending Rate system, i.e. RLLR system. Among all these methods, the RLLR system is the latest. The implementation of this system took place in banks on 1 October 2019. This method has the highest transparency as it is directly linked to the RBI’s repo rate. Also, in this method, as per the RBI directive, banks will reset their customers’ loans at least once in 3 months. Thus, the customers can quickly benefit from the changes made by the RBI.
The Difference In Interest Rates
You must have noticed that the bank does not offer all its customers loans at the same rate. Despite having the same landing system, the effective rates of interest may be different for two customers. For example, the current repo rate of RBI is 4%; however, the bank may give loans to its customers at the interest rate of 6.84% to 9.10% per annum under the repo linked landing rate. Here, the whole game depends on the spread. The bank offers an effective rate to the customer by adding an additional rate to the repo rate. This additional rate is known as the spread. The spread depends on the customer’s relationship with the bank, his CIBIL score, his profession, the loan amount and its tenure, etc.
How to Reduce The Interest Rates?
If you have a floating rate loan and there is no reduction in your loan rate even after the RBI has reduced the rates, you can negotiate with the bank. You can negotiate a decrease in the spread irrespective of which lending rate system – RPLR, MCLR, or RLLR the bank is following for your loan. For example, if your home loan has a spread of 4% per annum, then the effective rate of interest is 8%. If the bank reduces the spread by even 1%, then the effective rate of interest will become 7%. You will get this benefit throughout the term. If the repo rate increases from 4% to 6% in the future, your effective rate will be 9% after the summation of 3% and 6% instead of 10% after the summation of 4% and 6%. This is because the spread remains constant. However, the bank will not do all this free but will charge a small fee from you. If the repayment period is long, then there is no harm in reducing the rate by paying a small fee. In this case, the bank will immediately reset your loan even if there is time left for the original reset date. If your bank does not reduce the rate as per your expectation, you can choose the balance transfer. This means that you can transfer the remaining loan balance to another bank, offering a lower interest rate.
After reducing the interest rate, the bank will give you two options: either to reduce the term of the loan or reduce the EMI. You can decide according to your need. If you do not pay the EMI, then it is better to reduce the loan term and be free from the loan quickly.
