Decoding home loan interest rates

Decoding home loan interest rates: 4 key questions to ask

 On April 1, 2016, a novel method of bank lending titled ‘marginal cost of funds based lending rate’ (MCLR) was introduced for all loans, inclusive of home loans. Loans were connected to the bank’s base rate initially but with MCLR, new borrowers could only opt for MCLR-linked loans and the borrowers already on base could choose and switch to MCLR. Today, the variations in MCLR poses various questions to the public on the parameters used by housing finance companies to calculate the basis of home loan interest. Amidst all the apprehension, what are the deciding factors?

  1. What is BPLR?

The National Housing Bank Limited, a subsidiary of the RBI is the governing and regulating body of all the Housing finance companies (HFCs). Therefore, the cash source for all the housing finance companies is different from that of the banks. Therein lies the reason why banks and housing finance companies differ in the interest charged on the home loans. So what is the distinguisher?

Housing companies places their actual lending rates against a benchmark rate, which is named, ‘Benchmark Prime Lending Rate’ (BPLR). Any interest rates for all the loans are calculated using this rate as the base. In general, this is highest rate that the housing finance company levies. You can safely say that a large share of the home loans, are provided at a rate that is below this PLR.

  1. Is PLR method ideal for borrowers?

How exactly does PLR affect the borrowers? This method guarantees no transparency to the borrowers because there’s no way a borrower can figure out the base rate, at which the HFC gives home loans to their best customers.

In addition, it’s usual for companies to give heavy discounts on PLR to the new customers. While this will increase their business, it might not appeal to the old users because they are forced to pay to the higher rates. The existing borrower can only benefit of lower rates when the lender reduces its PLR. However, this is not common.

  1. How are banks different in computing home loan interest rates?

Even though PLR was the go-to-method for banks till 2010, the RBI then introduced a ‘base rate’, for calculating the lending rates. This rate acted as the bottom line – below which the banks were restricted from lending to even the premium borrowers. This practice was introduced to ensure transparency in transactions. Also, the objective was to speed up how banks pass on the reduction in repo rate to the customers, faster the PLR regime.

  1. Should borrowers opt for a housing finance company or a bank?

It’s always recommended to choose a bank over housing finance companies. If you were wondering why, the transparency and better rates would be the strong advantages compared to the latter.

With a housing company, you might always incur extra charges. For example, if you are looking at opting for the new customer rates (lower rates), you are supposed to pay a ‘shifting fee’.

A lot of the borrowers go to companies only when they don’t have adequate documents or if there are singular problems. They are willing to pay a higher interest rate so that the purpose can be served in the long run.

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