Home loans are the most widely recognized sort of loans required nowadays. Consistently individual either has a home loan or a car loan or so far as that is concerned some other loan. Our lives have begun spinning around the EMIs that are deducted each month from the bank accounts. An individual is thought of as fortunate and favored assuming they don’t convey any sort of loans on their names. So how do you get rid of these EMIs before the mentioned end date or maybe reduce the amount and thus the burden from your shoulders? Let us look at this aspect in detail since all of us are keen to do so.
How do banks decide the Interest Rate?
This is an extremely fascinating subject for each individual who has an loan or is intending to take one. Every bank has different interest rate which they charge to the customers. This is different as it is linked to the profits and losses that the banks earn. Prior home loans depended on the model of PLR which means Prime Lending Rate. In this model, banks could charge the customer a lower interest rate than that fixed by the bank which was not transparent enough. Therefore, this model was rejected and a base rate was fixed. In this model banks couldn’t give a rate lesser than that of the base rate. In this model, banks could not provide a rate lesser than that of the base rate. But with this model also followed a flaw where the banks never passed the benefits of a base rate reduction to all the customers which made no point in reducing the rates by the Reserve Bank of India. Therefore, a new model was created called as the Marginal Cost of Lending Rate (MCLR). This model suggests that when there is a change in the MCLR it would directly change the EMI of the loan and would benefit or increase the repayment amount.
Switch Base Rate
The base rate is the least that a bank can offer to a borrower for their home loan. This implies that assuming the EMI is at a X amount it can’t be decreased at any given point of time. But if you switch your base rate to MCLR then you would be move, to a new and better interest rate which would reduce the EMI amount. There is an fee that banks charge to the borrower for changing from the base rate to MCLR. This is straightforwardly proportional to your principal amount which is remarkable with the bank. It is a X percent of the amount that you need to pay to the bank and get your home loan changed over into a MCLR. This will benefit you further if the MCLR reduces in the long run. But it also has a negative effect in case if the MCLR increases. This will increase your Interest rate and thereby your EMI as well. It is a gamble buy at the current market scenario you are saving some amount from your EMI which is the need of the hour for every borrower.
Banks Role
Banks play a significant part in saving your EMI or reducing it to a lower amount. However, banks don’t take a functioning part in doing as such. As a customer, you should to know every change in the economy that the RBI does and act accordingly to reduce your EMI on home loans. You can change from a base rate to a MCLR by visiting the bank and making the necessary changes. This is because the MCLR is dependent on the marginal cost of funds and cash reserve ratio and operating cost which are periodically changed for the betterment of the economy.
Since the new rule of MCLR being effective from first April 2016, the new loansd are given under the MCLR. However, the old loans should be moved to the MCLR from the base rate. This should be possible by paying a charge of 0.50% in addition to support charge on the exceptional amount which will be lesser than the rate that the borrower is currently paying. In this way, feel free to get your EMI reduced by changing from the base rate home loan to MCLR.
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