For a borrower, the EMI will depend primarily on three factors – the bank's MCLR, mark-up and the reset date.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today in its first Bi-monthly Monetary Policy Statement for 2019-20 announced a cut in the repo rate by 25 basis points. This is a second rate cut in a row after February 2019 rate cut of an equal margin. Taking both the rate cuts together, the repo rate has come down by 50 basis points.
“This move will surely benefit banks which eventually can ease lending in the sector. The second consecutive reduction shows positive signs which can surely enhance the demand for housing, marginally. Though the last cut wasn’t passed on to the consumers so we would have to wait and watch whether this time the consumers get the benefits or not”, says Manoj Gaur, MD, Gaurs Group.
Repo rate is the rate of interest at which banks borrow money from the RBI. After today’s rate cut, the repo rate stands at 6 per cent. As and when the RBI cuts the repo rate, there is money available with banks at a lesser cost and this, in turn, helps keep the lending rates low.
Its certainly good news for the new home loan takers as the effective home loan rate for them is expected to come down as MCLR (Marginal Cost of Funds Based Lending Rate ) of banks starts coming down. “It’s good news especially for home loan borrowers as the rate cut is signalling lower interest rates. Hence, we also hope that with this development, the banks will immediately pass on the cut to the home buyers, since that’s the confidence booster for the real buyer” says Amit Modi, Director- ABA Corp, President (Elect) CREDAI (Western UP).
Now, the ball is in the court of the banks and it remains to be seen how they pass on the benefit to the borrowers across a home loan, car loan, personal and education loan segment.
“The 25 bps cut in repo rate will most likely lead banks to reduce their home loan interest rates. However, the quantum of transmission of repo rate cuts will also depend on their cost of deposits, operating costs, etc as these factors are also factored while calculating MCLR. Hence, any increase in these factors may reduce the transmission of reduced repo rates to home loan lending rates, ” says Naveen Kukreja – CEO& Co-founder, Paisabazaar.com
At a home loan rate of 9 per cent, the EMI on Rs 1 lakh loan for 15 years comes to Rs 1,014, while if the rate falls up by 100 basis points i.e. 1 per cent, the EMI becomes Rs 956, a difference of Rs 58 or about 6 per cent fall! On a Rs 30 lakh loan, a 1 per cent fall translates into a monthly saving on EMI’s of about Rs 1,740.
For a borrower, the EMI will depend on three factors – the bank’s MCLR, mark-up and the reset date. Here’s how.
1.MCLR based pricing
From April 1, 2016, banks are supposed to calculate and declare the MCLR every month for various tenures of overnight, one month, three months, six months, one year, two years, three years rates. MCLR typically reflects the bank’s own cost of funds. Most banks offer home loan linked to 12 month’s MCLR while few offer loans linked to 6-month MCLR.
2. Mark-up matters more
Banks are not allowed to lend below their MCLR but may ask for a spread or a mark-up over their MCLR rate. The mark-up is generally around 30 basis points. Currently, SBI’s 1-Year MCLR is 8.55 per cent, while the home loan rate for salaried borrowers is 8.75 per cent after the mark-up of 20 basis points.
For the borrower, EMI does not change every time when the RBI cuts or raise the repo rate. The reset-date refers to the date when the loan contract will reset the home loan interest date based on the MCLR prevailing on that date. For example, one takes a loan ( with 12-month reset-period) in April 2018 when the MCLR of a bank is 8 per cent and the mark-up is 20 basis points, the effective home loan rate being 8.20 per cent. Now, even if the bank’s MCLR changes during the next 12 months, the borrower’s EMI remains constant. However, the bank will Reset EMI’s in April 2019 based on prevalent MCLR.
Effectively, MCLR linked flexible home loans are fixed-for-a-year loans.
How the MCLR moved over the last 36 months
As of February 2019, the average 1-year MCLR for public and private sector banks was 8.75 per cent and 9.3 per cent respectively.
One year back, in February 2018, the MCLR was 8.35 per cent and 9.0 per cent respectively.
Two years back in February 2017, the MCLR was 8.6 per cent and 9.10 per cent respectively.
In April 2016, when the MCLR regime started, the rates were 9.5 per cent and 9.8 per cent respectively.
The above data shows that although the MCLR rates and hence the home loan rates linked to it, had come down over the last two and half years, the downward movement got reversed from March 2018, the lowest MCLR being witnessed in February 2018.
What to do
Borrowers on Base Rate may shift to MCLR based loans unless their loan tenure is nearing maturity. Existing borrowers who are on MCLR may continue and expect the rates to fall further in the coming months.
For them, the bank’s MCLR on the reset-date is what matters.
But, for any borrower still paying above 10 percent on their home loan may look to get the loan re-financed from banks which are carrying lower rates. If the potential savings in the total interest outgo is huge, they should consider a home loan balance transfer.
However, before that, the borrowers may also explore switching to existing lender’s current rate by paying a certain switching fees.
New borrowers need to explore MCLR and Mark-Up of about 2 to 4 banks and then decide looking at the effective home loan rate. With the Pradhan Mantri Awas Yojana (PMAY) still around till March 31, 2019, new home buyers may consider to take advantage of its credit linked interest subsidy as well.