After today's rate cut, it remains to be seen how much impact with the recent rate cuts, it will have on the home loan and other borrowers.
Repo Rate in India: In a bid to encourage growth and tide over the disruptions caused by COVID-19, the Reserve Bank of India (RBI) today cut the repo rate by a massive 0.75 per cent, to 4.4 per cent from 5.15 per cent earlier. In February 2020 and before that in December 2019, the RBI had kept the policy repo rate unchanged. However, overall, in the year 2019, the RBI had moved swiftly and cut the repo rate by 135 basis points.
It, however, remains to be seen how much impact with the latest rate cut will have on the home loan and other borrowers even while the term loans are expected to come down. The RBI’s latest move is expected to lower interest rates for individuals who are also looking for personal loans and consumer good loans. If banks are able to lower the rates for them, they will propel demand and keep the consumption cycle on.
Further, all lending institutions such as banks, housing finance companies are allowed to provide a 3-month moratorium to borrowers who pay EMIs. Further details from RBI is awaited but as per industry experts, the borrower need not pay EMI without impacting the credit score.
The RBI has also cut the cash reserve ratio (CRR) of banks from 4 per cent to 3 per cent thus providing more money in the hands of banks to lend.
If the home loan interest rate comes down by 75 basis points, let us see how it will impact your EMI and total interest cost.
Assuming one takes a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:
EMI Saved – Rs 1533 ( Annually Rs 18,396)
Total interest saved – Rs 2.76 lakh
Watch: What is Repo Linked Lending Rate, Home Loan? RLLR meaning, comparison vs MCLR
Several banks have recently cut their 1-year MCLR on which the home loan interest is based upon. Recently, the Union Bank of India had announced cut in its MCLR by 10 basis points across all tenors, effective March 11. In the case of SBI, the MCLR was cut by 10-15 basis points across tenors with effect from March 10, with the one-year MCLR falling by 10 bps to 7.75 per cent.
A lower Marginal Cost of Funds based Lending Rate (MCLR) will help borrowers pay lower EMIs on their loan as and when their reset-period comes up.
Let us see how the MCLR across the banking sector has come down over the last 12 months for some leading banks. According to data shared by the RBI as on February 2020, the median 1-year MCLR of public sector banks since February 2019 has fallen from 8.75 per cent to 8.20 per cent as on February 2020. The median 1-year MCLR of private sector banks has fallen from 9.28 per cent to 9.10 per cent over the same period.
Remember, MCLR-linked home loans are applicable for those who had taken loans before October 1, 2019, and after April 1, 2016. For MCLR- linked borrowers, there is a 12-month reset period and thus any recent decision of the RBI may not have an immediate impact. It means for someone who had taken a home loan in April 2019, the home loan rate of interest for them will be revised in April 2020.
Currently (from October 1, 2019), loans including home and auto loans, offered by banks, are linked to an external benchmark, which for most banks is the RBI repo rate. As and when there is a revision in the repo rate, the home loan interest rate for the borrower gets revised within three months. The transmission, therefore, is expected to be faster in the repo-linked home loans than on the loans linked to MCLR – an internal benchmark of banks.
So, while borrowers on the repo linked lending rate (RLLR) will witness a much faster change in their EMI’s, after today’s announcement, those paying home loan EMIs based on MCLR, may have to wait till their reset period arrives. In their case, either their EMIs will come down or the tenure of the loan will become less.
If you are looking for a new home loan, there are two things to know from the bank – the bank’s RLLR or the external benchmark rate (EBR) and the actual spread or margin for you. The effective home loan interest rate will be important for you while comparing the home loan rate of interest with other banks.
If you are still on an MCLR-linked loan, you may either continue or switch to RLLR home loan with the same bank or another bank. No matter, whether it is an MCLR or RLLR home loan, make a plan to prepay the entire loan as quickly as possible to save interest cost.