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The Effect of External Benchmark Lending Rates on Home Loan Borrowers
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The Reserve Bank of India has replaced the Marginal Cost of Funds based Lending Rate (MCLR) with an external benchmark to ensure better transmission of policy rates. If you are planning to get a home loan with floating interest rates, then it is good news for you. RBI has directed all banks to link the new loans to one of the external benchmarks after 1st October 2019. The four benchmarks are,
Out of the above four benchmarks, most banks are choosing the repo rate to decide the interest rates on loans like personal loans, retail loans, home loans, etc. This year, the repo rate has been cut down by the RBI many times. However, the home loan buyers did not receive the benefit of it due to the guidelines of MCLR. This is the reason why the RBI has replaced MCLR with the external benchmark lending rate system.
Now, you must be thinking about the effect of these changed policies on existing and new home loan borrowers. Here is the possible effect on both types of borrowers.
The impact of External Benchmark based Lending Rates on New Borrowers
All banks are obliged to link external benchmark based lending rates to new personal, home and retail loans with floating interest rates. Moreover, banks are free to offer the same to their customers that are applying for any other type of loan.
Under the MCLR system, the transmission of decreased repo rates was not happening proportionately.
According to the circular published by RBI, the external benchmark linked interest rate will be reset at least once in three months. This will eventually make banks revise the floating interest rates on loans every three months and borrowers will get the benefits in a short time.
The Impact of External Benchmark based Lending Rates on Existing Borrowers
The RBI has declared that the existing borrowers can switch to external benchmark based lending rates from MCLR if they wish. However, they need to carefully examine their loan agreement. They need to contact their bank to ask them the procedure for the switch. So, the home loan borrowers may have to pay additional charges for it based on the guidelines of their banks.
Lastly, external benchmark based lending rates are applied for the loans given by banks and not by NBFCs like housing finance companies (HFCs). Currently, it is unclear whether this change would apply to them.
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