Your car and home loans just got more expensive. Last week, the Reserve Bank of India (RBI) increased its key policy rate by 25 basis points (bps) to 6.25% from 6%. One bps is one-hundredth of a percentage point. Before the rate hike, too, some banks, such as State Bank of India, Punjab National Bank, Bank of Baroda, ICICI Bank Ltd and Kotak Mahindra Bank Ltd, increased the marginal cost of funds based lending rate, or MCLR, by 5-20 bps. Some of them have also increased the base rate. This means those who got loans with old or new benchmark rates will have to pay more. Worried about its impact on your monthly budget? Here is how to handle it:
Prepare for higher expense
If your home loan is linked to MCLR, check the reset clause. Floating rate home loans are either linked to six-month or one-year MCLR. This means, the home loan rate will get reset at a stipulated time. For instance, if your home loan will be reset in August, you can prepare for the new rate. If you have a home loan that depends on base rate, the impact will be immediate. Currently, the base rate is at least 50-100 bps higher than MCLR. You could consider moving your home loan to MCLR from base rate. “Higher home loan rates are inevitable. If there is time for new rates to kick in for your loan, be prepared for it,” said Suresh Sadagopan, founder, Ladder7 Financial Advisory.
Don’t move to fixed rate yet
Banks offer home loans on both fixed as well as floating rates. This is the first time in four years that the central bank has increased the repo rate. MCLR, which was introduced in April 2016, saw its first hike in March. Currently, floating rate home loans are cheaper than the fixed rate ones. “Don’t move to a fixed rate home loan yet. They are still 50-100 bps higher than the floating rate ones,” said Sadagopan, adding that new borrowers should opt for a floating rate loan, instead of a fixed rate one.
Increasing tenure or EMI
When interest rates change, banks usually increase the tenure of the loan, leaving the EMI constant. “If the increase is of up to 25 bps, there is no need to tweak the loan. Even if the increase is more than 50 bps, you can continue to pay the same EMI for a longer tenure. You can also consider part payment, if possible,” said Bangalore-based Anil Rego, chief executive officer and founder, Right Horizons Financial Services. If you plan to borrow, make sure you compare interest rates across banks and non-banking finance companies. Also compare charges such as processing fee and administrative cost. Try to negotiate with a bank for lower interest rate and waiving of other charges, especially if you have a credit score of above 750.