RBI cuts repo rate. How much will you save on home loan?

It now remains to be seen how the banks react and when they start reducing their lending rates.

On the back of inflation data and the slowing growth rate, the Reserve Bank of India (RBI) cut the repo rate by 0.25 per cent on Tuesday, while keeping the Cash Reserve Ratio (CRR) unchanged. From 6.5 per cent, the repo rate stands at 6.25 per cent now.

It now remains to be seen how the banks react and when they start reducing their lending rates.

Since January 2015, the RBI has cut the repo rate by 1.50 per cent and banks have reduced their lending rates by about 0.5 per cent.

Repo rate is the rate at which the banks borrow from the RBI, while CRR refers to quantum of fund to be parked mandatorily with the RBI. Both, along with several other tools, are used by the RBI to infuse or suck out liquidity from the market.

Impact on home loan borrowers
A 0.25 per cent reduction may not appear much at this point, but if the rate keeps falling over a period of time and banks continue to pass on the benefit, the cumulative impact could be huge. There is a large amount of savings in the interest outgo over the long-term.

Borrowers stand to gain as and when banks reduce their lending rate. On a 9.50 per cent interest on a home loan of Rs 40 lakh for 15 years, the total interest burden can be reduced by Rs 1 lakh if the home loan rate also reduces by 0.25 per cent. Here’s how much you can save on various loan amounts:

Impact on bank’s MCLR
All loans with flexible interest rates, including home loans, and taken after April 1, 2016, are linked to the bank’s marginal cost of funds based lending rate (MCLR), while those before that are linked to the bank’s base rate. Pre-April 1 borrowers however, have the one-time option to switch to the MCLR rates.

Banks could start announcing a cut in their lending rates soon. Currently, one-year MCLR is about 9-9.5 per cent for most banks. Hence, the direct impact of the rate cut could be on the lower MCLR’s of the banks, which they disclose every month. The actual lending may happen at a mark-up. Say the bank MCLR is 9.25 per cent, the actual home loan may be fixed at 9.45 per cent, i.e., with a 0.20 per cent of mark-up.

ICICI Bank’s 1-Year MCLR is currently (effective October 1, 2016) at 9.05 per cent, while home loans are offered at 9.35 per cent (9.3 per cent for women borrowers). State Bank of India’s MCLR is at 9.05 per cent, while home loan rate is 9.3 per cent (9.25 per cent for women borrowers). Interestingly, 1-Year MCLR for ICICI and SBI on 1st April was 9.20 percent. Since then, it has come down by 0.15 percent.

MCLR linked home loans are either set every 6 months or after 1 year. Hence, the actual impact for new borrowers ( after April 1 ) may be still some months away. MCLR linked home loans are either are either set every 6 months or after 1 year. Hence, the actual impact for new borrowers ( after April 1 ) may be still some months away.

Options for existing home loan borrowers
For someone with an existing home loan on flexible interest rate, the benefit can be availed in two ways– either equated monthly installments (EMIs) may be reduced or the tenure. Banks on their own typically reduce the tenure automatically and thus transfer the benefit of lower rate to their customers. Ask your banker about how the adjustment has been done or log on to your home loan account (in few days time) to see if the benefit has been passed on to your account. If you wish to lower your EMI, you need to contact your banker and may have to submit revised Electronic Clearing Service (ECS) mandate.

Reduce tenure
Let’s assume you had taken a home loan of Rs 40 lakh at an interest rate of 10.50 per cent for 180 months with an EMI of Rs 44,216. Today, after say three years, the outstanding stands at Rs 36,12,000.
If your bank reduces the rate by 0.25 per cent, you have the option to keep the EMI constant, and the tenure falls by about nearly 40 months.

‘Switch over’
You may also switch your loan with the existing lender by opting for ‘switch over’ to current rate of interest on home loans. In doing so, one may have to pay 0.50 per cent plus taxes. Say, if you are paying 10.5 per cent and the bank is offering 9 per cent to new borrowers, switch over may be a better option.

Foreclosure
If you are continuing with a home loan with a higher interest rate than the competitors, you may foreclose and transfer the loan to a new lender. Many banks are running campaigns with no processing fees for loans that get transferred. If the difference in interest rates is high, it’s better to do so. There will not be any foreclosure charges if the loan is on floating interest rate basis and where the housing loan is on fixed interest rate basis and foreclosed out of your own sources.

New home loan takers
For those waiting for home loan rates to fall, the right time has come. With high level of unsold inventory with builders, it’s time to bargain with them.

In the table above: If you are looking for a home loan amount of Rs 36 lakh at 9.25 per cent for 15 years, the EMI will be (1029 * 36 lakh) / 100000 = 37,044.

Conclusion
Whether you reduce the EMI or the tenure or even transfer your loan to another lender, keep an eye on the total interest saved in doing so. If the existing loan is nearing completion, the impact of rate change may not be much. So, if your exiting loan is around three years old, consider a switch over or refinancing the loan from another lender only if the rate difference is high.

Source: http://realty.economictimes.indiatimes.com/news/regulatory/rbi-cuts-repo-rate-how-much-will-you-save-on-home-loan/54675006

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