Do not merely look at the bank's MCLR but know the actual home loan interest rate before finalizing the deal.
The home loan borrowers now have something to cheer about. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its Second Bi-monthly Monetary Policy Statement for 2019-20 has cut the repo rate by 25 basis points, which now stands at 5.75 per cent. Before this rate cut, the RBI has already cut rates by 50 basis points in the calendar year 2019 and hence taking today’s rate cut into account, the repo rate is down by 75 basis points since January 2019.
Consequently, the reverse repo rate under the LAF stands adjusted to 5.50 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 per cent.
Repo rate is the rate of interest at which banks borrow money from the central bank. 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.
Most importantly, the MPC also decided to change the stance of monetary policy from neutral to accommodative.
Both for the existing home loan takers and those who are about to take a home loan, today’s decision by the RBI should act to their advantage. Now, it remains to be seen, how the transmission by the banks to the borrowers happen. The banks are already under pressure for not passing on the benefits of the rate cut to the borrowers.
Home loan interest rates are linked to the banks MCLR( Marginal Cost of Funds based Lending Rate), which is a reflection of the bank’s own cost of funds. Banks declare their MCLR each month but monthly changes in the MCLR is not accounted for in the case of home loans. MCLR linked home loan interest rate is reset every 12 months and hence for a borrower the MCLR of the bank after every 12 months from the date of starting of the home loan matters.
The country’s largest lender, the State Bank of India (SBI), had cut its MCLR by 5 basis points across all tenors in May. After this reduction, the 1-year MCLR of SBI has come down from 8.50 per cent to 8.45 per cent. The immediate impact will be that the interest rates on all loans linked to MCLR will stand reduced by 5 basis points on the EMI’s starting May 2019.
Impact of lower MCLR – An example
Let us see the impact of consolidated 1 per cent fall in bank’s MCLR over 12 months and assuming the home loan interest rate also comes down by an equal margin.
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 EMIs of about Rs 1758.
A lower MCLR will effectively mean a lower home loan interest rate and, thereby, a low-interest burden, other factors remaining constant. A cut in bank’s MCLR benefits all car loan and home loans borrowers.
MCLR of Banks (May 2019)
Allahabad Bank : 8.60 per cent
Andhra Bank : 8.75 per cent
Bank of Baroda : 8.70 per cent
Bank of India : 8.70 per cent
Central Bank of India : 8.55 per cent
Corporation Bank : 8.90 per cent
Oriental Bank of Commerce : 8.75 per cent
Punjab National Bank : 8.45 per cent
State Bank of India : 8.45 per cent
UCO Bank : 8.65 per cent
Union Bank of India : 8.60 per cent
Axis Bank : 8.80 per cent
HDFC Bank : 8.70 per cent
ICICI Bank : 8.75 per cent
Indusind Bank : 9.85 per cent
Karnataka Bank : 9.40 per cent
Source: RBI (Not an exhaustive list.)
What to do
New home loan borrowers can now start exploring home loan options with the banks. Do not merely look at the bank’s MCLR but know the actual home loan interest rate before finalizing the deal. Bank’s are allowed to charge a Mark-Up on the MCLR before disbursing the loan. Finally, make a pre-payment to repay the home loan as soon as possible and own your home with 100 per cent equity of your own.