Home loan borrowers have something to rejoice about. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its Second Bi-monthly Monetary Policy Statement for 2019-20 has cut the repo rate by 25 basis points, which at present is 5.75 per cent.
Home loan borrowers have something to rejoice about. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its Second Bi-monthly Monetary Policy Statement for 2019-20 has cut the repo rate by 25 basis points, which at present is 5.75 per cent.
Before this rate cut, the RBI had already cut rates by 50 basis points in the year 2019. So, taking today’s rate cut into account, the repo rate is down by 75 basis points since January 2019. Consequently, the reversed repo rate under the LAF stands adjusted to 5.50 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 per cent.
Repo rate is the rate of interest at which banks borrow money from the Central Bank. As and when the RBI cuts the repo rate, there is money accessible with banks at a lesser cost and this in turn helps keep the lending rates low. Most importantly, the MPC also decided to change the position of monetary policy from neutral to accommodative.
Both for the existing home loan takers and those who are about to take a home loan, today’s decision by the RBI should be to their advantage. Now, it remains to be seen, how the transmission by the banks to the borrowers happen. The banks are already under pressure for not passing on the benefits of the rate cut to the borrowers.
Home loan interest rates are linked to the banks MCLR ( Marginal Cost of Funds based Lending Rate), which is a reflection of the bank’s own cost of funds. Banks declare their MCLR each month, but monthly changes in the MCLR is not accounted for in the case of home loans. MCLR-linked home loan interest rate is reset every 12 months and hence for a borrower the MCLR of the bank after every 12 months from the date of starting of the home loan matters.
The country’s largest lender, the State Bank of India (SBI), had cut its MCLR by 5 basis points across all tenors in May. After this reduction, the 1-year MCLR of SBI has come down from 8.50 per cent to 8.45 per cent. The immediate impact will be that the interest rates on all loans linked to MCLR will stand reduced by five basis points on the EMIs starting May 2019.
Impact of lower MCLR – An example
Let us see the effects of consolidated 1 per cent fall in bank’s MCLR over 12 months and assuming the home loan interest rate also comes down by an equal margin.
At a home loan rate of 9 per cent, the EMI on Rs 1 lakh loan for 15 years comes to Rs 1,014, while if the price falls up by 100 basis points, i.e. 1 per cent, the EMI becomes Rs..956, a difference of Rs.58 or about 6 per cent fall. On a Rs. 30-lakh loan, a 1 per cent fall translates into a monthly saving on EMIs of about Rs.1758. A lower MCLR will effectively mean a lower home loan interest rate and thereby, a low-interest burden, with other factors remaining constant. A cut in bank’s MCLR benefits all car loan and home loans borrowers.
MCLR of Banks (May 2019)
Allahabad Bank: 8.60 per cent
Andhra Bank: 8.75 per cent
Bank of Baroda: 8.70 per cent
Bank of India: 8.70 per cent
Central Bank of India: 8.55 per cent
Corporation Bank: 8.90 per cent
Oriental Bank of Commerce: 8.75 per cent
Punjab National Bank: 8.45 per cent
State Bank of India: 8.45 per cent
UCO Bank: 8.65 per cent
Union Bank of India: 8.60 per cent
Axis Bank: 8.80 per cent
HDFC Bank: 8.70 per cent
ICICI Bank: 8.75 per cent
IndusInd Bank: 9.85 per cent
Karnataka Bank: 9.40 per cent
Source: RBI (Not an exhaustive list.)
New home loan borrowers can now start exploring home loan options with the banks. Do not just look at the bank’s MCLR but know the actual home loan interest rate before concluding the deal. Banks are allowed to charge a Mark-Up on the MCLR before disbursing the loan. Finally, make a pre-payment to repay the home loan as soon as possible and own your home with 100 per cent equity of your own.