Buying a home is one of the main goals for most of us and home loans have made a home really easy even for people just starting out their career were looking for home loan….. Do you have home loan?? That too with a floating rate of interest….so many people who have an existing loan with floating interest are in big confusion why ROI is increasing quarterly basis…. Here is the small illustration on floating Interest rates…how it works
Now a days banks are offering the interest rates with base rate….prior to base rate earlier banks used to source the loan with BPLR (Bench Mark Prime Lending Rate)…..According to RBI it is nothing but banks are free to fix BPLR for credit limit over Rs 2lacs with the approval of their respective boards. It has to be declared and made uniformly applicable at all the branches ….. Banks may authorize their assets-liability management committee (ALCO) to fix interest rates on deposits and advances, subject to their reporting to the board immediately there after. Banks should also declare the maximum spread over BPLR with approval of ALCO/Board. BPLR is computed with following consideration
- · Cost of funds
- · Operational expenses
- · Minimum margin to cover regulatory requirements of provisioning, and capital charge profit margin.
The back ground: The main activity of banks is to gather funds from people in the form of deposits and lend this money to individuals.
Banks will get the money at a certain ROI and lends it at a slightly higher rate.
Why to banks need base/bench mark as a reference??
Each bank would have a different cost for the funds…in simple words, each bank would pay different ROI to it’s customers. For example SBI might pay 6% interest on 1year fixed deposit where as Indian bank might pay 9% for the same tenure.
Therefore, the rate at which the banks lend the money would also be different from different banks. But how the public know what the normal lending rate of bank is?? This is the reason reference rate is required… It is the rate that is derived based on the actual cost of funds to the bank. This is the rate based on which all loans of a bank are supposed to be priced.
Why RBI gave an end to BPLR??
The prime lending rate was introduced in 2003 to ensure that banks publish their lending rates based on their true cost of funds. All lending was expected to be at or above the BPLR. This was a fair expectation as you cant expect bank to lend belows its cost of funds. Banks stopped adjusting the BPLR when the interest rates went down- therefore, the BPLR lost its relevance as a rate reflection the cost of funds for banks.
The new “Base Rate System”:
The new system was introduced by RBI in response to complaints from home loan borrowers. The base rate system was kept in place with the objective of enhancing transparency in loan pricing and ensuring fair treatment to all borrowers.
How Base rate works??
If you borrow money to buy a house or car or any other appliance there is an interest rate that you have to pay to the lender. The base rate is the minimum rate that a bank will lend money. As we are aware previously banks used to source loans with BPLR.
Base rate will be calculated with the factors like the cost of deposits, administrative costs, a banks profitability in the previous financial year and a few other parameters with stipulated weights are considered while calculating lenders base rate.
Impact of Base rate: it’s expected that base rate system will increase transparency in credit pricing and address the shortcomings of the BPLR systems. Benchmark of most of the banks will decline to single digit. Again with base rate negative carry on CRR & SLR is expected that baserate will be directly impacted by the monetary measures initiated by the RBI. Small borrowers such as farmers who are close to BPLR rated would get credit of reasonable rates after the introduction of Base rate.
How to repay your loan home loan faster??
Part payment: if you have a excess funds with you try to make it as a part payment in your home loan so that your tenor will come down. Be careful while making the part payment some banks have a clause the foreclosure charges are also applicable for the part payment.
Increase EMI: If your financial situation has improved and you are making more money then increase your EMI which will reduce the term of your loan most lender will allow you to increase your payments with certain restrictions.
Lending money: Most of the people will lend money from other sources like personal loans, loan against gold to make part payment in home/mortgage loan this is the bad step where he has to pay interest to both the lenders.
Prompt Payment: Do pay your EMI on monthly basis without return/bounce…check with your bank if its returned try to repay at an earliest to avoid the return charge/penal interest.
Follow the communication: when ever there is repricing (ROI/EMI increase) every bank will intimate the same to their customers via letter, email, phone….If there is repricing in your loan based upon your outstanding, remaining tenor banks will fix whether to increase your EMI or Tenor. If your EMI got increased do check with your banker whether you have to give new instruction/PDC and make arrangements accordingly.
Hope this article will helps you in understanding the picture of floating interest and some of my tips to repay your loan will also helps you. Soon will post another article with best examples to get a clear picture on interest calculation, charging e.t.c….!!!
