As the holiday season approaches, banks and non-bank finance companies (NBFCs) are expected to cut interest rates on home loans and even waive processing fees as time-limited offers . As a mortgage borrower, there can be some great bargains at a reduced price, especially if you know how to keep the bank contract flexible and in your favor. Read on to find out how you can do it.

As a mortgage borrower, there are three main factors you need to consider when choosing a bank.

One of them is the interest rate on the loan. As of April 1, 2016, interest rates on all loans – fixed or variable – including home loans, have been linked to the bank’s MCLR (borrowing rate based on marginal cost of funds). New mortgage customers as well as old borrowers who are on the base rate and wish to switch to MCLR-based loans will now pay an interest rate in line with the bank’s MCLR.

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For example, the SBI’s base rate is currently 9%, while the 1-year MCLR is 8%. Remember that the real interest rate of a borrower servicing a prime rate loan can be much higher.

As a home loan borrower, however, the MCLR isn’t the only thing that matters – the markup and reset period are also important factors to consider.

Don’t ignore the markup in an MCLR loan

Although banks are not allowed to lend below the MCLR, they may add a mark-up or a spread or a margin, beyond it. Therefore, MCLR is not the only thing you should consider. Consider the effective mortgage rate, including the markup, while selecting the right lender. Example: Bank A and Bank B have the same MCLR: 8.25%, but they have a profit margin of 0.25% and 0.40%, respectively. Thus, the effective rate of mortgage loans would be 8.5% and 8.65%, respectively.

Line of credit and credit profile

Typically, across the banking industry, for a specific bank, the mark-up is the same for each borrower for the same type of loan. So if the bank charges a markup of, say, 0.30%, it will be the same for all of its mortgage customers. But a bank can revise the markup at any time based on factors like competition, aggressive intent to gain more market share, etc.

However, the new increase will only apply to new borrowers. For an existing borrower, the increase mentioned in the agreement documents on the date of the mortgage application would remain the same throughout the duration of the mandate. “The margin charged to you will not be increased throughout the life of the loan, except due to the deterioration of the borrower’s credit risk profile,” said a statement from HSBC (India).

When it comes to customer default, banks have set guidelines to follow. According to the rules of the Reserve Bank of India (RBI): “The mark-up charged to an existing borrower should not be increased except in the event of a deterioration in the customer’s credit risk profile. Any such decision regarding a change in mark-up due to a change in the credit risk profile must be supported by a full review of the client’s risk profile. ”

So if your credit profile deteriorates, your loan markup may increase.

Interestingly, the rules are silent when it comes to reducing markup. In the event that an existing customer’s credit profile improves, there are no set guidelines for reducing the mark-up on a loan. “Ideally, banks should reduce the spread when a customer’s credit profile improves. However, in a practical sense, this rarely happens, ”says Gaurav Gupta, CEO of MyLoanCare.in, an online lending marketplace.

However, a good credit history may not be enough to convince the bank to lower the mark-up. This is because your credit score could just be one of the many inputs used to arrive at the markup. “The client’s risk profile is assessed based on a credit assessment performed by the bank, for which a credit report is one of many inputs. Therefore, there is no direct link between the credit report or credit score and the profit margin. large banks, Bank of Baroda is the only bank which associates the profit margin with the credit rating at the time of the sanction ”, informs Gupta.

As a customer, until the banks have processes in place, you can still benefit from an improved risk profile. “We see banks reviewing the line of credit on loans calibrated by MCLR in two circumstances. The first, when the customer defaults on payment of the equivalent monthly payments (EMI), and the second, when customers ask banks to transfer their loan to another bank. In the latter In this case, it is common for banks to lower the profit margin in order to keep customer credit on their books, ”explains Gupta.

Importance of the reset period

Under MCLR-based loans, the mortgage interest rate is reassessed periodically. Home loans can be tied to 1, 3, 6 or 12 month bank MCLRs, however, not all banks currently offer them. A reset period, in effect, is the waiting period for borrowers to see an impact on IMEs after the RBI cuts repo rates.

While only a few banks offer a 6 month reset period, most banks continue to offer a 12 month reset period. HSBC Bank in India offers home loans with a reset period of 3 months. So let’s say you took out a home loan with a 12 month reset period in September 2017 and the RBI lowers the reverse repo rate in October 2017. Even though the bank’s MCLR may go down in the same month, the RBI lowers the repo rate in October 2017. Even though the bank’s MCLR may go down in the same month, the effect on your home loan will be seen a year later in September 2018. So if the reset period is shorter, interest rates may change more frequently.

Read also: Should you opt for a 6 or 12 month MCLR linked home loan?

Now, even if the reset period is set at 12 or 6 months in the agreement when the loan is disbursed, it can be changed. According to the MCLR rules, “Banks must, at their discretion, specify interest reset dates on their variable rate loans. Banks have the option of offering loans with reset dates tied to either the date of the first loan / credit limit disbursement or the MCLR review date.

So, when banks have flexibility, a borrower should ensure that the reset period is tied to the MCLR review date instead of the disbursement date. “The goal of MCLR is to ensure faster transmission of interest rate changes to end borrowers, which is best served by opting for a reset date linked to the MCLR review date,” Gupta said. .

Make sure that this clause is mentioned in the loan agreement so that the revision takes place automatically on the reset date. Instead of predicting the evolution of interest rates and trying your luck, use the flexibility offered by the MCLR rules.

Conclusion

Only banks, not NBFCs, should offer MCLR-linked loans. The latter offers loans based on their cost of funds, with no mark-up and reset period. Few banks can offer a fixed interest rate for the first year and then allow you to convert the loan into an MCLR loan after one year. In such cases, make sure that the conditions related to the mark-up and the reset period are clearly mentioned in the agreement. The reset period, in itself, is a double-edged sword and therefore keeping it flexible and reviewing it becomes important in the MCLR-based regime.