While RBI's probable rate hike in June MPC meet in view of inflationary pressure, rising crude oil price and volatile Indian currency was well factored in by some of the leading lenders with a rate hike made in both deposit and lending rates even before the announcement. Some of the banks have increased the MCLR rate after the announcement. Wondering, what does this means for you? The marginal cost of fund based lending rate regime introduced lately, with a hike by even some basis points, can prove to be hefty on your pockets in case of long-tenure loans such as home loans as the interest outgo over the tenure will increase.
Let's now learn how you can deal with the interest rate hike.
No immediate change in EMI: For the average existing borrower, there shall be no change in EMI amount with an increase in the bank's MCLR rate. However, going forward you can expect the tenure of your loan to increase thus increasing the overall cost of the loan.
Opt for balance transfer of loan amount: As banks, HFCs and NBFCs offer varied rate of interest and deals you can also look at the option of home loan balance transfer, in case the new loan scheme at another financing institution offers you substantial savings on interest outgo. But ensure that you factor in all of the indirect cost such as administration and other processing fee, as the institution you now approach for the home loan balance transfer takes it as a fresh loan application. Also, if your request for balance transfer is approved, there can be a chance to avail a top-up loan at a lower rate, using which you can consolidate your debt.
Move to MCLR based loan offered at banks: In a case, when you have availed a loan from the housing finance company that follows prime lending rate regime, you can be at a better position by opting for a home loan balance transfer at a bank for availing the MCLR advantage. The MCLR rate regime scores over other rate-regimes as it offers better transmission of monetary policy rates.
Choose longer reset period: Notably, under the MCLR regime, the pre-set loan reset date concept works in the favour of a borrower as the interest rate is locked until the next reset date becomes due. So, even if the lender increases the rate, EMI for the borrower remains unchanged.
Make Pre-payment: To avoid higher interest outgo, it will be a wise move to prepay some loan amount in case you have just secured a loan and are in the initial years of your loan tenure. But if you are nearing the end of the loan tenure do stick to it till the end as changing the structure at this point makes no sense.
For new loan applicants
You have to choose between the fixed or floating rate. Fixed rate of interest for loan means the rate may be fixed for the entire loan tenure or for a part period. In a case when the interest rate is fixed for a part of the tenure, the interest rate after the reset period is switched to the floating rate which is dependent on the market conditions. In the present scenario, the floating interest rate is cheaper in comparison to fixed rate.