Bottom for home loan rates falling: Are good days ahead for borrowers?

Most banks were going slow with hikes to marginal cost-based lending rates (MCLR) and hadn’t changed their MCLR rates along with the repo rate hikes. MCLR is the minimum rate a bank needs to charge for a loan.

"As per RBI's reports, as of March 31, 2023, interest rates went up by only 1.35 percent on most old home loans based on the 1-year MCLR regime compared to home loans on External Benchmarks Lending Rate (EBLR), which have seen the entire rate hike of 2.5 percent passed on to them," Bansal said.

EBLR ensures better transmission of policy rate changes. In case of a repo rate cut, banks have to pass on the entire benefit to borrowers.

Even the weighted average lending rate of new EBLR loans was twice as much as that of existing MCLR loans. This means that a borrower who had their rates reset last October or December has a much lower interest rate.

Now that the rate hikes have stabilised, the MCLR rates are also being rationalised. Notably, recently rates have been hiked for MCLR primarily and not the Repo Linked Lending Rates or EBLRs.

HDFC Bank on Monday raised MCLR by 15 bps. ICICI Bank, Punjab National Bank and Bank of India even revised their MCLR on loans across tenures.

"Banks have increased their MCLR to account for their increased cost of funding caused by higher deposit rates. Note that banks stopped linking their floating rate home loans to MCLR ever since the introduction of EBLR in October 2019. Thus, the MCLR increase would only impact those having existing home loans linked to MCLR, from their rate reset dates," said Ratan Chaudhary, Business Head, of Home Loans at Paisabazaar.

To understand, such MCLR increases would not impact home loan rates offered to fresh home loan borrowers or those seeking to transfer their home loans to other banks at lower interest rates.

Base rate and MCLR loans form a huge chunk of outstanding loans at 48.5 percent in March whereas EBLR loans are nearly 50 percent. The dependence on non-EBLR loans is seen more in government banks (64 percent of outstanding loans), whereas, in private banks, EBLR loans are now at 73 percent, Bansal said.

Notably, banks stopped linking their floating rate home loans to MCLR ever since the introduction of EBLR.

Experts advise potential buyers to exercise prudence and not solely base their decision on the current interest rate environment. Long-term financial planning and considerations should take precedence, as rates can eventually fluctuate based on economic shifts.

"If borrowers want a greater degree of certainty in their rate movements, they should refinance to EBLR loans without delay," Chaudhary said.

Additionally, they should check if the home loan balance transfer offers are available on their credit profiles. Existing home loan borrowers, especially those who have witnessed significant improvements in their credit profile after availing of the original loan, may be eligible for availing of home loans from other lenders at much lower interest rates.

On top of these, current borrowers should review their existing home loan agreements, understanding the terms and conditions. If possible, they could consider refinancing options that may offer better interest rates or favourable terms. Also, they can see whether switching from a floating rate to a fixed interest rate is a feasible option. Fixed rates can provide stability in uncertain times, but borrowers should weigh the potential costs against the benefits.