1% Drop Means a Lot!

Our Prime Minister is dropping bombs one after another on the critics and clearing the deck for absolute sustainability and winning the hearts of the \'Aam Aadmi\'. Post demonetisation and Union Budget 2017, the banks have readily reduced their interest rates on home loans giving headroom to everyone for opting in and materializing their dreams of owning their own homes. In the yester year, home loan rates were hovering in the bracket of 10 to 11% but now one can avail at interest rates as low as 8.5%. We say that this drop is significant and we are even more exited to reiterate that even a 1% drop creates a real market hullabaloo and a huge relief to your financial planning when it comes to buying your own home.

Price Corrections: A \"Myth\"

With interest rates falling, one may think that home prices should also fall. In fact, there was also communication on the market grapevine about the same. No harm in thinking the same, but sorry, this not gonna happen! It\'s a \'myth\' both literally and metaphorically. You will only find the prices at current levels or an increase. So, better make a simple move and take your decision. You will relish the \'decision of buying\' and consequently change your quality of life in the long run.

We are not saying for the sake of saying or just making an arbitrary statement. Industry leaders of the industry have already given written commitments that they are ready to compensate if prices fall by doling out \'Price Protect\' schemes. Our MD, Mr. Jitendra Khaitan, hse stated in a leading daily recently, that \"the price protect scheme is attractive for speculative buyers and there is close to 50% hike in queries along with 10-15% in actual sales now\". The underlying logic follows the basic law of demand. With demand increasing, prices will rise. Now, if supply rises proportionately with demand, price rise will be adjusted and will not fall. Hence, the notion that price correction is a myth is a science. Hence, with falling interest rates of home loans the demand will only rise.

Let's cut to the chase

To be precise, a 1% drop in the interest rates of home loans, amplifies your eligibility by 10 times. With the new Credit Link Subsidy Scheme (CLLS) under PMAY (Pradhan Mantri Awas Yojana), the EMIs have come down by an average of Rs. 2000 per month. We have seen fence sitters getting enthused and making purchase decisions.

The RBI (Reserve Bank of India) has introduced the MCLR (marginal cost based lending rate) method, effective from April 2016, to enable a faster transmission of rate cuts to bank customers, replacing the base rate method that was being used by banks to set their lending rates-earlier the base rate had replaced the less transparent prime lending rate (PLR). Now, borrowers who took loans 4-5 years back and did not ask their bank to switch to the newer regime, are still linked to the PLR. Those who borrowed when the base rate became the benchmark are stuck with the base rate. Now, while banks are giving new loans at cheaper rates, based on MCLR, old customers are still paying higher rate.

Since banks offer different rates, it is better to visit some common aggregator and understand the lowest rates available in the market. This will help one to bargain better with their bank. To reduce the interest outgo, one needs to shift their loan from base rate or PLR to MCLR. Shifting to MCLR now is a good move.

The importance of reset charges comes into the purview. There are two types of loans: fixed and on floating rate. Floating rate loans are supposed to mirror the rise and fall in interest rates set by the RBI. The introduction of new benchmarks has also turned out to the banks\' advantage. They charge customers for shifting from one benchmark to another from PLR regime to base rate regime to MCLR regime now. The charges are levied to meet the expenses involved in drafting and registering new agreements-stamp duty, registration charges, etc. Though these expenses vary across states, ordinarily they won\'t be more than 0.2% of the outstanding amount. However, some banks try to profit from this also by charging around 0.5%.

Should you go for a reset even if it involves a small charge? Yes. The amount you save will be significantly higher over the years.

To illustrate, consider the case of a home loan borrower with Rs.50 lakhs loan amount and a 15-year tenure. A 1% fall in interest-from 9.5% to 8.5%-will bring his EMI from down from Rs. 52,200 to Rs. 49,250, a reduction of Rs. 2,950 per month. There will be aggregate savings of Rs. 5.31 lakhs, which is significantly higher than the reset fee of Rs.25,000, even at the maximum rate of 0.5%. You may be able to get this reset cost down by negotiating with your bank. One of the ways is that of threat of shifting to another bank. This often works.

The mercury is rising - Feel the heat and book your dream home by taking that home loan now!