Home loans are one of the biggest financial commitments of one’s life. Most of the home loans are big-ticket loans and hence little mistakes can create big issues in future. When you plan to avail a home loan, you are to take a number of precautions. Among many things to consider, one has to be very careful about selecting the lender.
Before you step into any bank to apply for your home loan, there are few things to know about the policies that the lender follows. Most of the times, the borrowers do check the interest rate, the prepayment terms or the lock-in period of the lender. But the above mentioned are not the only thing to check before you select any lender. There are some other terms that have to be checked to find the best lender for your home loan. Today we will learn the three most important factors of a lender that impact the cost of borrowing your home loan.
Factors That Can Change Home Loan EMI Amount
The abbreviation MCLR stands for Marginal Cost of funds based Lending Rate. This is a methodology of the Reserve Bank of India (RBI). The MCLR sets lending rate on loans by commercial banks to the public. MCLR of any bank is built on four components—the marginal cost of funds, tenor premium, operating expenses and Cash Reserve Ratio (CRR). Depending on those four components, banks determine the MCLR.
All home loans in India are linked to MCLR. The interest rate on any kind of loan depends on the MCLR of that particular bank. The MCLR can vary from bank to bank. When you search for a home loan, you are to find the MCLR of that bank. If a bank’s MCLR is low so will be the rate of interest on your home loan. One can find the MCLR of the bank on their website or by contacting the customer care support of the bank.
The interest rate of a home loan has two basic components. The base rate and the spread or mark-up. The base rate is the rate below which RBI does not allow banks to lend. The spread is the margin on the base rate which is based on customer – and product-specific factors. If your bank has a spread of 0.10%, you will have to pay an interest rate which is 0.10% more than the base rate. Let’s say the base rate of your bank is 9%. So the interest rate you will be paying is 9.10% in which 9% is base rate and 0.10% is the spread. If your bank has a higher spread or mark-up, your interest rate will be higher.
The reset period is the next term which impacts the home loan EMI. The reset period is closely related to MCLR of a bank. The MCLR of any bank supposes to declare overnight, monthly, half-yearly and yearly. Even though banks do declare the MCLR according to the rules, but most banks link their home loan to 6 months MCLR or 12 months MCLR. If a borrower takes a home loan which will link to MCLR in 12 months, the home loan interest rate will reset after 12 months.
Let’s understand the same with an example. For instance, you have taken a loan on Jan 2018 at the interest rate of 8.90 percentage with the reset period of 12 months. The MCLR came down to 8.50 per cent in the month of March and 8.30 in September. During the period when the MCLR is less, you will still have to pay the previous rate as your home loan is with 12 months reset period. Let’s say, again in the month of December the MCLR rose to 9.00 per cent. So in the month of January 2019, your loan will be reset to 9.00 per cent.
The Concluding Lines
Home loans are the credits of quite a big amount and generally runs for a long span of time. When the loan amount is huge and tenure is long, the smallest difference in interest rate can bring a huge difference in the total cost of borrowing. So mind those small yet important things to make your home loan give you the best benefits.