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RBI Cuts Repo Rate: How Much Would You Save On Home Loan? - IndiaNotes.com
RBI Cuts Repo Rate: How Much Would You Save On Home Loan?
Dynamic Equities Pvt Ltd | Published: 07 Oct, 2016  | Source : IndiaNotes.com


The RBI - Reserve Bank of India cut the repo rate by 0.25% on Tuesday on the back of inflation data and the decelerating growth rate, while keeping the CRR - Cash Reserve Ratio unchanged. From 6.5%, the repo rate now stands at 6.25%.


A loan adviser stated that this repo rate cut could lead to a good borrowing environment, particularly for the retail customers. He expects the retail credit growth to inch up, and predicts a higher demand for mortgages and personal loan. He concluded that given the rationalisation in real estate prices, and low interest rate atmosphere, had made it a good time to buy home and thereby expect an evident increase in first home mortgages.


What is repo rate?


‘Repo rate’ is the rate at which the banks borrow from the Reserve Bank of India.


What is Cash Reserve Ratio?

  • ‘Cash Reserve Ratio’ can be defined as the quantum of fund to be parked obligatorily with the Reserve Bank.
  • RBI uses the above two with other tools to either infuse or to suck out liquidity from the market. 


Impact on the bank’s lending rates:


The thing which now remains to be witnessed is how the reaction of banks and when they start decreasing their lending rates. Since the month of January 2015, RBI has cut the repo rate by 1.50% and the banks have decreased their lending rates by nearly 0.5%.


Impact on marginal cost of funds based lending rate (MCLR) of banks:


All the loans which have flexible interest rates, enveloping home loans, and taken after 1st April, 2016, are linked to the bank's MCLR, while those ahead of that are linked to the base rate of banks. However, borrowers belonging to the pre-1st April group have the one-time option to switch to MCLR rates. Soon, banks could start announcing cut in their lending rates. Presently, one-year MCLR is close to 9-9.5% for most banks. Therefore, the rate cut’s direct effect could be on the lower MCLRs, which the banks disclose every month. The actual and factual lending might happen at a mark-up. For instance, if the MCLR is 9.25%, the actual home loan might be fixed at 9.45%, which clearly indicates a 0.20% of mark-up.


The MCLR of SBIstands at 9.05%, while home loan rate is 9.3%. On the other hand, ICICI Bank's 1-Year MCLR stands at 9.05%, while home loans are offered at 9.35%. The fact which draws attention is that the one-year MCLR for both ICICI and SBI on April 1 was 9.20%. Since then, it has edged down by 0.15%.


MCLR-related home loans are either set every six months or after one year. Therefore, the actual impact for novel borrowers (post- April 1) may be still some months away. The base rates-linked pre-April 1 borrowers too will see an impact, however it may take time.


How are home loan borrowers impacted?


Currently, the rate cut is not of much impact, however if it keeps declining over a time period and banks keep passing on the benefit, the cumulative impact could be massive. Borrowers stand to benefit as and when banks decrease their lending rate. On a 9.50% interest on a home loan of Rs.40 lac for a time span of 15 years, the total interest burden can be decreased by Rs.1 lac if the home loan rate also decreases by 0.25%.


How are home loan borrowers impacted?


Currently, the rate cut is not of much impact, however if it keeps declining over a time period and banks keep passing on the benefit, the cumulative impact could be massive. Borrowers stand to benefit as and when banks decrease their lending rate. On a 9.50% interest on a home loan of Rs.40 lac for a time span of 15 years, the total interest burden can be decreased by Rs.1 lac if the home loan rate also decreases by 0.25%.


How much can you ‘save’ on various loan amounts?


In lay man terms, if you are looking for a home loan of Rs.36 lac at 9.25% for 15 years, the EMI will be 37,044.

 


How are the existing home loan borrowers benefitted?

  • Either EMIs may be reduced.
  • Or the tenure may be reduced.


Banks on their own typically decrease the tenure automatically and thereby transfer the benefit of lower rate to their customers.


Points to remember:

  • Ask your banker how the adjustment has been done or may be log on to your home loan account to check if the benefit has been passed on to your account.
  • If you want to lower your EMI, you have to contact your banker and may even have to submit revised ECS - Electronic Clearing Service mandate.


Now let us take a hypothetical situation to make things clear. Assume that you had taken a home loan worth Rs.40 lac at an interest rate of 10.5% for 15 years with an EMI – equated monthly installment of Rs.44,216. Today, after say 3 years, the outstanding stands at Rs.36,12,000. If your bank reduces the rate by 0.25%, you can opt to keep the EMI constant and the tenure declines by about a bit more than 3 years.


The lifeline of switching over:


You have an option of ‘switch over’ by which you switch your loan with the existing lender to current rate of interest on home loans. You may have to pay 0.50% plus taxes in this option. For instance, if you are paying 9.5% and the bank is offering 8% to the new borrowers, switch over might be a better option.


What is a Foreclosure


Foreclosure is a process by which the right of home ownership is transferred from the homeowner to the lender or bank. A home goes into a state of foreclosure when the owner stops paying his mortgage loan payments.


How is a foreclosure advantageous?


If you have taken a home loan which has a higher interest rate than the competitors, you have the option of foreclosing and transferring the loan to a novel lender. A good number of banks are running campaigns with no processing fees for loans which get transferred. It is better to do so if the difference in interest rates is high.


There won’t be any foreclosure charges:

  • If the housing loan is on floating interest rate basis
  • Where the loan is on fixed interest rate basis and foreclosed out of one’s own sources.


Are you taking a home loan for the first time?


For the ones awaiting home loan rates to decline, the right time is now. With a great level of unsold inventory with builders, time has come to bargain with them.




Takeaways:

  • Whether you reduce the equated monthly installment (EMI) or the tenure or even for that matter transfer your loan to another lender, you have to keep a constant eye on the total interest saved while doing so.
  • If the existing loan is nearing its completion, the impact of rate change might not be much. So, if your existing loan is around 3 years old make a ‘switch over’ or refinance the loan from another lender, but if the rate difference is high.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.