The equivalent monthly instalments (EMIs) of the current loans have multiplied along with the soaring home loan rates, possibly upsetting people’s family budgets. Yet, by concentrating on the loan interest spread, there could still be a way to circumvent this issue.
According to a recent BankBazaar research, interest rate spreads on house loans have reached new lows, giving homeowners a chance to solve the issue.
Every retail loan has two parts to the interest rate: the benchmark rate and the spread. While the spread varies from borrower to borrower, it is fixed for the duration of the loan. Based on the borrower’s credit rating, source of income, and loan amount, the spread is determined.
For instance, it indicates that the interest margin would be 2.50 above the repo rate for a salaried borrower with an excellent credit score of 750. As a result, the total interest rate will be 9.00 (6.5 + 2.5).
The rate at which commercial banks are able to get loans from the Reserve Bank of India (RBI) is now 6.5 percent. Given that banks benchmark it to adjust the rates on their existing home loans in accordance, the present repo rate is noticeably high. Assume the loan rate changes to 9.25 if the repo rate increases by 25 basis points to 6.75.
Yet, the BankBazaar research points out that house loan spreads have been decreasing over time. The lowest spreads on house loans, according to the research, “stood at 1.95 in March 2023, rapidly declining from the almost 3.50 widespread in March 2020,” highlighting the difficulties homeowners face comprehend when increasing rates are combined with declining spreads.
Floating-Rate Mortgages
Home loan interest rates may be impacted by inflation, changes in the repo rate, and lender rules. As an example, the margin by which bank home loan rates are reset corresponds to changes in the repo rate.
The paper emphasises that, in a high-inflation environment, “taking advantage of these rate disparities might help individuals save millions of rupees on outstanding loans.
The Best Rates Are Offered to Credit-Worthy Customers
The lowest rates or spreads are often awarded to the most credit-worthy borrowers, those with excellent credit ratings and steady sources of income. According to the report, because of these complications, new borrowers are in a better position than existing borrowers since they may “lock in a reduced spread now and pay less compared to a pre-pandemic borrower who may be paying a large premium above the market rates.”
Refinancing the loan might be a straightforward answer in this situation, whether it comes from the same lender or a different one. But, the cost of refinancing from the same lender could be much lower than from a new one in terms of processing costs, paperwork, etc.
