Have a query regarding your home loan? Maybe we can help.

Drop us a line and our expert, Harsh Roongta, will answer it.

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I took a floating interest rate loan at 7.55. Now it has risen to 8.5%.

Is there a chance that the home loan lender might cheat me when calculating the interest rate?

- Jatin Ganatra

This is a valid customer query. The reason is not far to seek.

The floating rate (or adjustable rate or variable rate loans as they are called by some lenders) loans are normally linked to some internal rate within the bank whose calculation is not transparent.

These internal rates normally apply only to home loan borrowers and may move completely independently of other interest rates notified by the bank. This may lead to overcharging by the lender. 

An example will make this clear:

Bank A has fixed its 'Mortgage Retail Lending Rate' at 10%.

It fixes its floating home loan rate at a 1% discount to the above. So it will be 9%.

Interest rates rise.

When this MRLR changes to 11% your effective rate becomes 10% (11% - 1%). That is fine in principle.

Interest rates fall.

The problem normally occurs when the rates drop. The bank may choose not to drop the MRLR (since, except for the rate for home loan borrowers, nothing else is dependent on this rate).

But it may still pass on the benefit of lower rates to new consumers by giving them a higher discount of say 2%. So a new customer will get 8% (10% - 2%) but you will be still get it at 9% (10% - 1%).

Read Home loans: Fixed or Floating rate to understand this in detail.

In fact, some banks go even further. They may start a completely new reference rate (say home loan rate) for new consumers, thus allowing them the benefit of new reduced rates. At the same time, they may deny the benefits to existing consumers as the MRLR is not changed.

Similar problems can occur during rise in rates also.

Thus, having a transparently determined floating rate is most important.

Some banks like Kotak and UTI Bank [Get Quote] link their home loan rates to their fixed deposit rates. This is quite transparent, since the bank is likely to keep the fixed deposit rates in line with the current market scenario.

Some banks like ING Vysya link the floating rate to the MIBOR, which is a market determined transparent rate.

Even in these banks, it is important to read the document carefully to ensure the mechanism is clearly mentioned in the agreement.

Thus, you can see you need to be vigilant so that the lender is not overcharging you. Change lenders if your existing lender is doing so.

As they say, 'The price of freedom is eternal vigilance.'