A large number of existing home loan borrowers in India switch their ongoing loans to new lenders to enjoy a reduction in interest rates and consequently, lowering on the home loan EMIs.
Home loan refinancing (or home loan transfer) is the process of transferring an existing home loan from one lender to another. The new lender settles all the outstanding dues of the borrower to the old lender. The borrower then continues paying EMIs for the rest of the tenure to the new lender.
There are plenty of reasons why borrowers switch lenders – to enjoy a reduction in interest rates, to benefit from better service and other goodies. Yet, the main reason why borrowers transfer home loans is that they can enjoy a lowered interest rate. Before you switch your ongoing home loan to a new lender, you must understand how interest rates are fixed for home loan refinancing in India.
Interest Rate Regime for Home Loan Refinancing
As per the RBI’s directive, all bank loans in India, including home loan transfers that were taken after 1st April 2016 are linked to the MCLR (Marginal Cost of Funds based Lending Rate). Earlier the interest rate was linked to the base rate offered by the bank. The MCLR methodology replaced the earlier base rate system that was introduced in 2010. However, note that home refinancing availed at NBFCs (Non-Banking Financial Corporations) or housing finance companies are not linked to the MCLR. Non-bank lenders can set their own rates based on their availability of funds and competition.
The applicable rate of interest on refinancing loans consists of two components – the MCLR and the markup rate. The interest rate you will be paying is the sum of both these components. Let’s take a closer look at the MCLR and markup rates for better understanding of home loan refinancing interest rates.
MCLR (Marginal Cost of Funds based Lending Rate) – It is the lowest interest rate that a bank can lend at. It is a tenure-based internal benchmark. Each bank determines the MCLR rate, and it is based on the remaining repayment tenure of the loan. Banks revise their MCLR price periodically based on multiple inputs. The RBI introduced the MCLR rate for more accountability on the part of the lenders and more flexibility for borrowers.
Spread – This is a small percentage that is added to the MCLR to arrive at the actual interest rate offered to a borrower. The spread varies based on the loan type as well as the borrower.
Final home loan refinance interest rate = MCLR + Spread
7 Factors that Impact Home Refinance Interest Rates
One of the main reasons why borrowers opt for home loan refinancing is because of the reduction in interest rates. However, note that the actual interest rates you are charged will vary from the advertised interest rates offered by the bank. Let’s take a look at the key factors that play a crucial role in determining the actual interest rate offered to you.
As mentioned above, the MCLR rate is the minimum interest rate at which a bank can lend loans. However, the actual interest rate is a bit higher than the MCLR rate. This rate is fixed considering several factors like marginal cost of funds, operating cost, CRR (Cash Reserve Ratio) and more. The MCLR rate is revised once every year on the annual reset date.
Fixed or Floating Interest
While opting for home loan refinancing, borrowers can choose between fixed or floating interest rates. With a floating rate, the interest rate of the home loan varies based on RBI norms. If the RBI announces a reduction in interest rates, then the EMI of your home loans fall and vice versa. With a fixed interest rate, the EMIs remain the same for the entire tenure, irrespective of changes in prevailing interest rates.
Besides fixed and floating, there is another type of interest rate known as – mixed interest rates. Home loans with a mixed interest rate have a fixed interest for a specific period and then floating rates for the rest of the tenure.
The Loan Value
Higher the quantum of the outstanding loan value, higher is the rate of interest charged. This is because higher loans pose a higher credit risk for the lender.
The credit score plays a significant role in determining your interest rates. Higher the credit score, higher is the repayment capacity of the lender. Hence, lenders are likely to offer better interest rates for borrowers with high credit scores.
The location of your home also plays a significant impact on determining your loan interest rates. Homes that are in a prime location have excellent amenities, and better connectivity is considered desirable and has a higher resale value. On the other hand, properties that are located far away from the city centre and with poor connectivity have lower resale values.
Lenders prefer borrowers with properties that have a higher resale value. Homes that have higher resale value are attractive and attract lower interest rates. On the other hand, homes that have lower resale value attract higher interest rates.
Income and Employment of the Borrower
Individuals who are steadily employed and earn stable incomes are considered low-risk and are offered lower interest rates. On the other hand, borrowers who don't have a steady income are deemed high-risk, and lenders charge them higher interest rates.
Generally, salaried employees, self-employed professionals like chartered accountants, doctors and long-term business professionals are considered low-risk and enjoy better interest rates.
The remaining tenure of your home loans has an impact on the interest rates charged. Loans with long tenures attract higher interest rates, compared to loans with shorter tenure that attract lower interest rates.
Impact of Interest Rates on Home Loan Transfers
The primary reason why borrowers choose home loan refinancing is for a reduction in the interest rate. The interest rate is dependent on several factors. Some of these factors like – credit score, job profile – are under your control, and you can further reduce the interest rate by getting these factors to work in your favour. On the other hand, factors like MCLR, the economy are beyond your control.
Make sure to keep all these points in mind, while choosing a home loan transfer provider, so that you get the best rates possible.