Kumari Palany & Co

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How the new norms affect the home loan interest from next year April?

Posted on: 15/Dec/2018 1:02:05 PM
Reserve Bank of India has regulated the interest calculation of home loans to be entirely based on external benchmarks such as Treasury bill rates and repo rates. The new scheme of interest deduction will be active from the month of April, 2019. At present bank use internal benchmark of in-house interest calculation based on their own marginal cost of raising funds. The latest change in the whole setup creates lot of queries among the customers who availed the option of housing loan about the interest amount. Possibility of decrease in the interest is not yet established with the new system of external criteria for loan calculus.

More than ninety percent home loans are floating rates as per the current banking scenario for public and private sectors under RBI guidelines. Loans are offered for fifteen years with the revised interest calculated on basis of finds received and flowing through the particular bank. Banks set their own benchmark for acquiring lending rates of all housing loan schemes base on the income and capacity. Prime lending rate (PLR) is determined with the benchmark prime lending rate (BPLR). Then followed by the Base rate (BR) and the recent updating of marginal cost of funds lending rates (MCLR). Now all the lending rates dealt with the interest of the home loans is determined by the external benchmarks that is common to the entire banking and financial aspects of the country.

Market will decide the loan from now on, especially after the official disbursal of the loans. The rate at which RBI lends comes around 6.5 percentage for housing loans. The rate can be increased at repo rate plus 2.5 % margin and the loan offered with the total interest rate of 9 percent. Banks can act upon this kind of interest decision with the customer but once the loan is disbursed the interest rate will be calculated only by the external influence of market. This kind of calculation sets a variable with the home loan interest calculation that may largely increase on some home loan schemes depending on the market situation at some downside points. Lending rate may increase or decrease frequently disturbing the whole constant interest payment method for the customers.

The main advantage of such market based interest calculation is that the banks cannot manipulate the cost of funds to raise the interest rate for housing loans depending on the time period. A fair deal is possible for all payers of interest by using this external benchmark deal from April 1, 2019.

The new interest determination can help the customers to choose the loan scheme and amount with the help of market variation. Banks can tweak rates between the new and old customers for maintaining the base but this kind of market based approach will equalize the interest rates for all customers irrespective of the banks intervention.

The external benchmark can be deducted from the policy repo rate or the 91 or 182 days Treasury bill rate decided by the Financial Benchmarks India (FBIL).