As per the repo rate linked benchmark rate, if the home loan borrower is a salaried individual, the rates are below 8 per cent.
The SBI home loan borrowers paying EMI’s on their loans will heave a sigh of relief. The interest rate on SBI home loan, for the first time in over 15 years, has fallen below 8 per cent per annum. This is true for those borrowers who have their home loan linked to the MCLR and loans based on the repo linked lending rate (RLLR).
Since October 1, 2019, the loans are linked to the RBI ‘s repo rate which had already been 8 per cent for certain categories of the borrowers. “SBI had linked interest rates on all retail loans including a home loan to repo rate as RBI had directed all scheduled commercial banks to link them to an external benchmark. Since the reduction in repo rate, SBIs home loan rate for a salaried individual is the range of 7.20 per cent to 7.55 per cent depending on the loan amount with effect from April 1, 2020. As per the repo rate linked benchmark rate, if the home loan borrower is a salaried individual, the rates are below 8 per cent,” says Jitesh Karlekar, Director-Capital Markets Research, JLL.
The recent fall in the SBI home loan interest rate is mainly owing to the big cut of 0.75 per cent in the repo rate by the RBI. With the repo rate coming down by such a huge margin, the cost of funds for banks get lower. As a result, banks especially SBI because of excess liquidity at a lower cost is able to see their MCLR come down. MCLR is the Marginal Cost of Funds based Lending Rate and is an internal benchmark of the funds largely representing the cost of funds for a bank.
But, how crucial is the 8 per cent mark as far as buying interest in real estate is concerned? “The 8 per cent mark is linked to the lowest home loan rate offered post the global financial crisis of 2008, which could attract home buyers. However in today’s scenario, lack of clarity about job security and economic growth would have bearing on the home buying decision,” informs Karlekar.
After the outbreak of COVID-19, the impact on the real estate sector could be long-lasting. “ In the real estate sector, the construction has been halted due to the lockdown. In the next few months, there may be a dip in the pace of the sector with reduced new launches and extension in completion of projects. While the presence of the pandemic remains for an uncertain time, there is a certainty in the damage to the real estate sector in this year,” says Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani.
How MCLR based borrowers benefit
All retail loans including home loans sanctioned by banks between April 1, 2016, and September 30, 2019, are linked to MCLR. However, banks are allowed to keep a Spread over and above the MCLR to determine the home loan rate of interest for the borrower.
Most home loans based on MCLR are linked to the bank’s 1-year MCLR. SBI’s 1-year MCLR as on April 2019 was 8.5 per cent, while it has come down to 7.4 per cent as in April 2020. Even after adding the Mark-up, the effective rate of home loan interest rate will be below 8 per cent.
This may not be true for all borrowers as for many banks the MCLR is still above 8 per cent. But, with the lower cost of funds as MCLR of other banks falls, the home loan interest rate for them may also fall below 8 per cent.
In the case of SBI home loan, the Spread or Mark-Up is based profession, gender, amount of loan etc. This Mark-up is generally capped at around 25 basis points for salaried individuals and about 40 basis points for non-salaried on loans up to Rs 30 lakh. On loans between Rs 30 lakh and Rs 75 lakh, the Spread is capped at about 50 basis points and 65 basis points for salaried and non-salaried individuals, also based on the borrower’s risk group.
How RLLR based borrowers benefit
Since October 1, 2019 banks are mostly sanctioning RLLR- Repo linked lending rate. For a salaried, the SBI home loan interest rate varies between 7.2 per cent and 7.55 per cent depending on the loan amount. Every time, RBI revises the repo rate, the revision in the interest rate is much quicker for the borrower compared to the loans linked to MCLR.
MCLR based loan- How much is your savings
With the banks lowering their MCLR, the borrowers will stand to benefit over the long term. The actual savings are not only in terms of lower EMI or lesser tenure but also on the overall total interest payout for the borrower.
For example, if the home loan interest rate on a loan for 15 years with an outstanding amount of Rs 35 lakh comes down by 1 per cent, the EMI comes down by nearly Rs 2,045 ( Rs 24540 annually) and the borrower ends up saving about Rs 3.7 lakh if other factors remain same.
For those looking to switch from MCLR to RLLR, it may be better to wait before switching. Although predicting the movement of interest rate is difficult, any upward movement will not be favourable to RLLR based borrowers.