After a long and tiring wait, home-loan borrowers have finally got a reason to rejoice. After all, home loan rates have fallen to their lowest levels in more than five years with some state-owned banks, including SBI and UBI, announcing steep interest rate cuts, which is likely to be followed by private banks soon.
While the nation’s largest bank SBI has slashed its MCLR (marginal cost of lending rate) by 90 basis points across all-tenure loans, bringing down the effective home loan rate to 8.60% from 9.10% per annum earlier, Union Bank of India reduced its MCLR by 65-90 basis points for loans of various tenures and PNB cut its MCLR by 70 basis points for 1, 2 and 3-year tenures. This is likely to result in a bonanza, especially for borrowers either having or willing to have long-term home loans of, say, 15 to 20 years and more.
“The new home loan rates are the lowest in the last 6 years and are surely going to help a lot of people buy their dream home. From now onwards, in case of SBI, for home loans up to Rs75 lakh, the interest rates will be 8.60% p.a. and for others, the rates would be as low as 8.65% p.a. which was earlier 8.90% p.a. In addition to this, SBI has also revived a teaser rate loan where for the first two years, the loans will be available at 8.50% p.a. and at a floating rate in subsequent years,” says Rishi Mehra, co-founder, deal4loans.com.
Thus, if we assume that .50% is reduced across all banks for a new borrower, this is what he is going to save now:
|Loan Amount||Tenure||Interest Rate||EMI||Total Interest|
|30,00,000||20 Years||8.60%||Rs. 26,225||Rs.32,93,972|
|30,00,000||20 Years||9.10%||Rs. 27,185||Rs. 35,24,405|
From the above table, it is clear that for borrowers, a 50 bps rate cut would mean a significant amount of savings. Assume a loan of Rs.30 lakh borrowed for a period of 20 years currently at 9.10% interest. This would imply an EMI of Rs 27,185. Over 20 years, the borrower would be paying Rs 35,24,405 as interest. A 50 bps fall in interest rate would bring down the EMI to Rs.26,225 and the total interest paid to Rs 32,93,972. That’s Rs 2,30,433 saved in case of a 50 bps cut.
“This will, thus, result into savings of over 2.3 lakh over a 20-year tenure and monthly saving of 960 per month. This will ensure a lot more demand in the sector and we are already seeing 300% increase in traffic for home loans from yesterday,” says Mehra.
Who will benefit?
The current as well as the prospective rate cuts will undoubtedly benefit new home-loan borrowers as the prevailing rates will naturally apply in their case. But what about the existing borrowers? Will they also get benefited from the falling rates?
For the existing borrowers, the rate cut would take time to reflect until the next reset period if they are on MCLR. That is because if you have taken an MCLR-linked loan, the interest rate that you pay is subject to changes at fixed intervals as per the tenor for which rates are linked. For instance, SBI resets the rates annually (from the date on which the loan is taken), while some other banks do so every quarter. Also, “the change in the interest rate would usually be seen in the reduced tenor and not in the EMI until you decide to refinance your loan,” says Adhil Shetty, founder & CEO of BankBazaar.com.
The MCLR system, however, was adopted by banks from April 1, 2016, replacing the base rate system. Therefore, those who had taken home loans before April last year would have their EMIs linked to the base rate. Therefore, these borrowers will have to either enter into a fresh contract with their bank to get their loans linked to MCLR, or they should wait till their lender reduces the lending rate for them too. If that doesn’t happen, which is usually the case, then they should try to get their loan shifted to another lender by paying the required fee.