Building a dream home lingers in every person's mind. The very thought of thinking about the finance which is required to built it, stop us from taking further steps. Many people won't proceed and bury the thoughts in their dream land. These days there a lot of banking institutions and NBFC (Non Banking Financial institutions) ready to offer loans. The world is running at knot speed and the financial institutions who understood the lack of time of a potential customer started offering instant loans (These days loan sanctions are faster than coffee preparations :-))
Everybody acknowledge the fact that the loans reach them faster with less hassles. In the process of getting a smoother service during loan process we fail to understand our home loan better. Many amongst us fail to understand on how to negotiate on our home loan. This article deals about the 4 must to know points about your home loans.
Source of funds:
In order to have a better bargain we need to know the source of funds. There are 2 channels , the first being banks eg: ICICI bank, Indian Bank, Corporation Bank, AXIS bank etc.. governed by RBI and the second being Housing Finance Corporations(HFC) eg : LIC Housing Finance Limited, HDFC Ltd etc.. governed by National Housing Bank.
Interest Rates:
Effective July 1st 2010, RBI issued guidelines to make loan offerings based on Base Rates. This was done keeping in mind the interest of people(especially the existing borrowers who payed more compare to new borrowers). Since then banks follow the base rate to offer loans.
Effective 1st April 2016, RBI suggested to offer loans based on MCLR(Marginal Cost of funds based Lending Rate).MCLR is the average cost of funds for a bank. Bank should be replacing the Base Rate system with MCLR. SBI was the first bank to introduce MCLR based home loans for new borrowings. The advantage of this system ensures that the home loan is not increased immediately once the Repo rate is increased by RBI.
Housing Finance corporations (HFC) follow the BPLR or RPLR to offer loans . This is called Benchmark Prime Lending Rate(BPLR) or Retail Prime lending Rate(RPLR)
Repo Rates:
The rate at which RBI lends bank for short term is called Repo Purchase Rate. If RBI borrows money from the bank the rate at which it borrows is called Reverse Repo Rate. If the repo purchase rate is increased by RBI then the cost of borrowing becomes costlier, whereas if this rate gets reduced then loan becomes cheaper due to lower cost of funds. Hence repo rate plays an important role in rate of Interest at which loans are offered.
Spread:
Spread is an important term in fixing your home loan rate of interest. It is the difference between the Base Rate or RPLR and your actual rate of interest. Banks call this difference as "Mark Up" and HFC call it as "Discount". For example ABC bank offers home loan at 10.75% ( Base rate/MCLR 9.75% and mark up of 1%) & HFC offers home loan at 10.75% ( RPLR @ 16.5% and discount at 5.75%).
As we know that repo rate has direct impact on the home loan rate of interest, let us assume an example, give the above scenario the repo rate is reduced by RBI by 0.25%. Then ABC bank will offer home loan at 10.5%( Base rate/MCLR 9.5% with a mark up of 1%). HFC will offer at 10.5% (RPLR @ 16.25% and discount at 5.75%)
At every change in repo rate the bank or HFC does not instantly change their base rate or RPLR. Also the spread varies from one customer to other. This is the prime reason for difference in rate of interest between 2 customers of the same bank or even with other banks.
Steps to do:
You need to understand your spread for the home loan offered.Negotiate with your financial institution to have a lower spread. A better negotiation will help you lower rate of interest. After all , home loans are long term commitments and even a minor change in the interest rate will help us save a lot.
Go Ahead, Negotiate your Spread & Reduce your Burden !!!!
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