Took Home Loan from SBI, Axis, ICICI or any other bank? Your EMI set to fall

Home loan: After cutting the repo rate by 135 basis points in the calendar year 2019, the Reserve Bank of India (RBI) has kept the repo rate unchanged in its last monetary policy meeting for the year. However, saving money on home loans may still be a reality for the borrowers. Those borrowers who have home loans linked to a bank’s MCLR may still see a lower EMI at least in the near future. Sample this: SBI’s MCLR last year this time was 8.5 per cent and when the reset date comes up in December 2019, the MCLR for SBI is already down to 8 per cent now. Home loan EMIs will come down for those whose reset-period comes up in the months ahead. If your bank is not reducing the EMIs, it would have reduced the tenure instead. The net impact is on lower interest burden on your loan.

RBI in its statement said -“The 1-year median marginal cost of funds-based lending rate (MCLR) has declined by 49 basis points. However, the transmission is expected to improve going forward as the share of base rate loans, interest rates on which have remained sticky, declines MCLR-based floating rate loans, which typically have annual resets, become due for renewal.”

As per RBI data, the median MCLR of public sector banks was 8.7 per cent in November 2018, while in Nov 2019, it had come down to 8.35 per cent. Further, the data also shows that MCLR rate peaked in the period December to February 2018 and touched a median high of 8.75 per cent. After 135 basis points repo rate cut in the calendar year 2019, many banks have their MCLR of about 8 per cent. The transmission has not been full and there remains a room for the MCLR to come down further. Borrowers may set to gain in terms of lower EMI from now on.

Since October 1, 2019, the home loan the interest rate of the banks is linked to RBI’s repo rate, therefore, any reduction or increase in the repo rate translates into an immediate reduction or increase in the lending rates of the banks. Unlike the transmission of rate cuts in the Base Rate or the MCLR regime, transmission under the repo linked home loans is expected to be faster now. The revision in repo rate is to be passed on to the borrower at least once in every three months. However, the flip side of repo rate linked home loan is that if RBI raises repo rate, the borrowers will find their EMI going up in quick time.

The policy repo rate stands at 5.15 per cent. In the calendar year 2019, even though the RBI has cut the repo rate by 135 basis points, it is only from October 2019 that the banks were asked to replace the erstwhile lending based on MCLR to lending based on an external benchmark such as repo rate. The last rate cut by RBI in October 2019 was of 35 basis points.

Let us how a 60 basis points or 0.6 per cent cut in home loan interest rate impacts 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:

Existing borrower – EMI based on MCLR
Those borrowers who had taken a loan from banks before October 1, 2019, the rate of interest is linked to the bank’s MCLR, which is an internal benchmark of the banks. MCLR home loans come with a reset-period of generally 12 months from the date on which the loan had commenced. The impact of RBI rate cuts during these 12 months will not be there. Compare the interest rate of MCLR loan with that of RLLR home loan rate to decide whether shifting from MCLR to repo rate loans help. For quicker transmission of rates, repo rate linked loans help but when rates rise, MCLR borrowers will see their EMI going up after a time lag.

New borrowers – EMI based on RLLR
Most banks have their lending rate linked to the repo rate of RBI. Some banks call it – repo linked lending rate (RLLR) or some may call it Effective Benchmark Rate (EBR). But, the actual lending to the borrower will not likely be on the RLLR or EBR. Banks may keep a risk premium or a margin over and above the RLLR or EBR. The rate of interest on the home loan may also be different for salaried, non-salaried and could be based on gender and loan amount.

So, as a new borrower, there are two things to know from the bank – the bank’s RLLR/EBR and the actual spread/margin for you. The effective home the loan interest rate will be important for you while comparing the home loan rate of interest with other banks.

SBI home loan interest rate
Let us look at SBI home loan interest rate and the factors on which it varies across borrowers:

With effect from October 1, SBI’s EBR is 8.05 per cent (Repo rate of 5.40 per cent +2.65 per cent). Remember, the RBI repo rate was 5.40 per cent on October 1 and future rate cut will reflect in future months only.

For salaried, SBI home loan interest varies between 8.2 per cent to 8.55 per cent, depending on the loan amount. Women are given a loan at a 5 basis points discount.

For non-salaried, SBI home loan interest varies between 8.35 per cent to 8.70 per cent, depending on the loan amount. Women are given a loan at a 5 basis points discount.

For both salaried and no-salaried, the rate will also depend on the risk profile of the borrower and the loan to value ratio.

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