The home loan borrowers in India prefer switching their ongoing loans to a new lender to avail of maximum benefits of a lower interest rate. The more significant impact of this shift is that it helps to lower the EMI cost to be borne by the applicant. When an applicant transfers the existing home loan to a new lender, this process is called home loan refinancing.
After the transfer is done, the responsibility of settling the outstanding dues of the borrower to the old lender lies with the new lender. The borrower will continue to make EMI payments for the remainder of the home loan tenure to the new lender to whom the transfer has been made.
To understand the switch in a better sense, let us dig deeper into learning how the interest rate for refinancing of home loans is fixed in India.
Home Loan Refinancing – Interest Rate Regime
The RBI has laid out a directive stating that home loan transfers made after the 1st April 2016 are linked to the MCLR (Marginal Cost of Funds based Lending Rate). Before the issue of this directive, the interest rates were linked to the chosen base rate offered by the bank. A note of exception to this directive states that the directive will not be applicable under circumstances wherein home loan refinancing is being availed at an NBFC or a housing finance company. In such a case, the non-bank lenders are free to offer their rate, which will be based on funds at their disposal for offering and the competition.
The interest rate applicable in refinancing comprises two components- The markup rate and the MCLR. The final interest rate charged to the borrower is a sum of these components. Let us understand the given concepts better to learn more about the overall interest rate for refinancing.
MCLR (Marginal Cost of Funds based Lending Rate) –
- The lowest rate at which a bank can lend a home loan is the MCLR.
- The MCLR is based on tenure and is defined by the bank’s internal benchmark.
- Whenever a case of refinancing occurs, the bank will analyse the remaining tenure of the home loan and accordingly determine the MCLR.
- Banks generally revise the MCLR periodically as it is based on several inputs.
- The MCLR is fixed after careful consideration of the operating cost, Cash Reserve Ratio, and the marginal cost of funds.
- The percentage added over and above the MCLR as the markup is called a spread.
- The markup generally varies based on the type of loan that a borrower avails.
- After adding markup, the final interest rate is offered to the borrower.
Fixed or Floating Interest
The borrowers can choose between the floating and fixed rates of interest. The interest rate will vary based on RBI’s rules and regulations in the floating rate of interest. Assuming the RBI issues a directive for a reduction in the rate, the cost of EMI will fall subsequently.
On the other hand, the fixed rate of interest remains constant throughout the remainder of the home loan tenure. There is also a concept of mixed interest rate, wherein the borrower opts for a floating interest rate for a specific period and then switches to a fixed rate of interest for the remaining period.
To get a grip on the numbers, the home loan applicants can use the home loan EMI calculator, which is available online for free of cost. The applicant can enter the loan details and get an idea of the EMI cost to be borne by them. The home loan EMI calculator facilitates the entire process smoothly. Hence, the borrower should use these facilities and arrive at an informed decision for their home loans!