Shopping for home loans? Hold on

Deals could get sweeter with banks likely to reduce lending rates significantly in the coming months

Lending rates, which were on the rise last year, have been cooling off since the beginning of this year — indeed a welcome relief for borrowers. But the cuts have been few and little. This despite the 50 basis point reduction in policy repo rate by the RBI this year, up until the latest policy review last week, when the central bank cut rate by another 25 bps.

Tight liquidity thus far has limited banks’ ability to lower lending rates. If liquidity eases in the coming months, banks may speed up lending rate cuts; the RBI’s rate cut last week can also nudge banks to make more meaningful cuts in lending rates.

So, as a borrower, if you have been waiting on the sidelines, you should hold out a bit more before shopping for home loans. Sharper reduction in lending rates by banks in the coming months could make home loans cheaper.

More cuts

From January until now, many banks have lowered their one-year MCLR (marginal cost of funds based lending rate) by just 5-10 bps. Floating home-loan rates are benchmarked against MCLR, on which banks add a spread to arrive at the effective loan rate.

Hence, unless there is a sharp cut in MCLR, home loans may not get significantly cheaper.

With the latest rate cut by the RBI, the policy repo rate has fallen by 75 bps so far this year. This is likely to trickle down to affect lending rates in the coming months, making loans much cheaper. Hence, keep a watch on rate movements and start shopping for home loans when the deal gets sweeter.

On offer

But while you are on the wait, it would be prudent to know what banks are offering now and what the best deals are. When lending rates start declining significantly, the cheapest loans now are likely to get more attractive.

So what are the best deals now?

In the ₹30-75-lakh loan category, for salaried borrowers, Central Bank of India offers home loans at 8.55 per cent effective interest. Allahabad Bank (for borrowers with high credit score), United Bank of India (8.6 per cent), Bank of Baroda (for high credit score), Bank of Maharashtra, Canara Bank, PNB and Union Bank of India (8.7 per cent) are a few other banks that offer among the best deals. The home loan rates in other leading banks, such as ICICI Bank (9.15 per cent) and SBI (8.85-8.95 per cent depending on risk grade of the borrower) are slightly higher. Currently, interest rates offered by housing finance companies (HFCs) are higher than the best deals offered by banks.

With lending rates to move lower, keep an eye on the cheaper loans. Remember, unlike under the earlier system (base rate as against MCLR), where a revision in base rate would be immediately be reflected in the lending rates of all loans benchmarked against it, under MCLR, lending rates are reset only at intervals corresponding to the tenure of the MCLR. For instance, in the case of home loans benchmarked against the one-year MCLR, lending rates will be reset every year.

Hence, wait for a substantial fall in lending rates before taking the plunge.

Switching at a cost

If you are a borrower and the relatively higher interest rate on your home loan is pinching you, moving to a cheaper loan can save you a tidy sum over the loan tenure.

But remember, make the shift only if your interest savings are substantial and the remaining loan tenure is long. Also, switching loans involves costs. Make the change only if the benefits are significant.

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