Mortgage interest rates fall by around 2% in 5 years: should we switch from MCLR to RLLR?

Mortgage interest rates may have bottomed out and are at their lowest for several years. Existing borrowers are looking to switch from MCLR to repo as the rates for new borrowers are much lower than before. Currently, a few large banks offer home loans at interest rates of around 6.7%, depending on certain conditions, and for the majority of borrowers, the interest rate can be around 7%. This is still lower than what many borrowers paid on loans taken out about 5 years ago.

A typical example is the marginal cost of funds (MCLR) lending rate in April 2016, which was above 9% for most banks. The effective interest rate on mortgage loans would have been around 10.5%, taking into account the “Mark-Up”. Today, the 1-year MCLR is around 7% for most banks, a decline of around 2% in 5 years.

However, since October 1, 2019, RBI has mandated banks to offer retail loans such as home and auto loans linked to an external benchmark, which for most banks is the RBI Repo Rate. It is therefore called the Pension Linked Loan Rate (RLLR). Today, most banks offer loans based on the RLLR which for most banks is around 6.65% or 6.8%.

This is because if someone has taken out a loan linked to MCLR and manages the IME at a rate of around 10.5%, should the borrower switch to a loan at the current rate of around 7%? The deal looks tempting because there is a saving of almost 2.5 percent on the interest rate on home loans.

Even a reduction of 100 basis points can help you save a few lakhs in interest charges, depending on the remaining term of the loan. Assuming a home loan of Rs 40 lakh over 15 years, the savings in EMI and interest (on 200 basis points down) will be:

NDE saved – Rs 4,758 (Rs 57,000 annually)
Total Interest Saved – Rs 8.5 lakh

Many mortgage borrowers still pay EMI for their banks MCLR related loans. Currently, banks offer loans based on an external benchmark, which for most banks is the RBI repo rate. It is generally referred to as RLLR-Repo rate lender. As an EMI home loan payer, you can switch from MCLR to RLLR either with the same bank or with another bank. You can get the existing mortgage linked to MCLR migrated or converted to RLLR by the bank. So, if you are considering a SBI home loan transfer from MCLR to repo rate, or ICICI home loan change from MCLR to repo rate, or to a loan from any other bank, you can do that.

When to change

If your mortgage is MCLR tied and the interest rate is high, you may want to consider switching, especially if the remaining tenure is a few years away. However, keep in mind that the change in RLLR is much faster than in MCLR, so if the repo rate increases, the mortgage rate will also change much faster than in MCLR linked loans. “Borrowers should consider switching to cash gain after factoring in the new interest rate which is expected to be 30bp lower than the current rate and second, if the loan is at least 3 years before closing Says V Swaminathan, CEO of Andromeda & Apnapaisa, India. largest distributor of credit.

Two ways to change

There are two ways to switch to a lower mortgage interest rate. As an EMI home loan payer, you can switch from MCLR to RLLR either with the same bank or with another bank. In other words, you can migrate or convert the existing mortgage linked to MCLR to RLLR by the bank. When you transfer the loan to another bank, it is generally referred to as a balance transfer or refinancing in mortgage parlance.

Refinancing your loan

The process of refinancing or transferring a balance with another bank can take a few days. “It’s very simple once you identify a target bank that has a lower rate. You have to apply to the bank, submit a KYC, loan statement, etc. and wait for the sanction letter. After that, ask the existing lender for the closing amount and deliver the closing letter to a new lender who will move the process forward, ”Swaminathan informs.

Before switching to your current banker or a new banker, make sure you have verified the fees. “Beware of processing fees and other switching costs that could make the transfer unattractive. Also, read the new loan agreement carefully before you change, ”says Swaminathan.