How new RBI rules on floating rate loans benefit home loan borrowers
In the past 12 months, big-ticket floating rate loan borrowers have had a rough ride. The continuous uptick in interest rates has triggered a sharp reset of rates in their floating rate loans. Taking cognisance of the numerous complaints received on the changes imposed by lenders without proper communication or consent of borrowers, the RBI has introduced a new framework for resetting floating rate loans.
Here is how the new measures will provide succour to borrowers.
When the interest rates on a floating rate loan rise, borrowers may either see a hike in their EMIs, or an extension of the loan tenor, or both. However, lenders follow arbitrary practices in this regard. Banks and NBFCs still retain absolute discretion in the manner of resetting floating rate loans.
Often, lenders do not communicate to the borrower about the reset. Neither is consent obtained on whether the reset should be done via a hike in EMIs or an extension of tenure. Both the routes have a different impact on the borrower, depending on size of the loan and years left for repayment.
Most banks have pushed extended loan tenures down the throats of hapless borrowers, adding up to 5-7 years’ worth of additional EMIs.
The interest outgo is much lower when EMIs are increased instead of tenure, particularly in the initial years, when the interest component is higher than the principal repaid. Under the new rules, lenders will have to be more transparent. At the time of sanctioning the loan, the lender will have to clearly communicate to the borrowers about the possible impact of a change in benchmark interest rate on the loan, leading to changes in the EMI, or loan tenor, or both.
