Kolkata: With the RBI’s unexpected move to slash the Repo Rate by 50 basis points on June 6, banks have started trimming their lending rates in earnest. Within hours of the central bank governor Sanjay Malhotra announcing the decision, the second biggest public sector lender Punjab National Bank trimmed its RLLR (Repo Linked Lending Rate) by 50 basis points. During the weekend, the biggest private sector bank HDFC Bank and major PSU lender Bank of Baroda also announced similar moves.
On Sunday, Bank of Baroda (BoB) cut its benchmark lending RLLR by 50 basis points, transmitting the entire benefit to the customers like PNB. Also HDFC Bank reduced its MCLR (Marginal Cost of Funds-based Lending Rates) by 10 basis points across tenures. Other banks are also expected to follow before long. Simply put, those borrowers whose loans are linked to these rates in these banks will benefit. However, all borrowers will not benefit automatically. The central bank has also cut CRR or cash reserve ratio, which is designed to inject liquidity in the system which will take place in the last quarter of the calendar year. With these twin steps, all banks will be in a favourable situation to trim home loan interest rates.
Amount of EMI reduction
Analysts have pointed out home loan borrowers could end up with some savings on EMIs. Some of them have pointed out that is an individual had taken a loan of Rs 50 lakh home loan with a repayment period of 20 years, the EMI can reduce by about Rs 3,164 after the rate cut. If the loan is Rs 1 crore, the benefit per month will be about Rs 6,329 and if the loan is Rs 1.5 crore, the EMI saving can be about Rs 9,493.
To what is your home loan rate linked?
Analysts have pointed out that the quantum and time of the rate cut transmission will depend on how the loan interest rate is pegged. The benefit will transmit the quickest if the home loan rate is linked to the repo rate. It will depend on when the bank/NBFC resets their rate of interest now. Until that reset is done, all EMIs will remain the same. Bank officials also say that most of the new homes loans are directly linked to the RBI Repo Rate, and, therefore, they would dip the soonest.
Refinancing an option
However, many home loan borrowers have their interest rates pegged to internal benchmark rates of the lenders such as MCLR or Marginal Cost of Funds based Lending Rate. An SBI Research Report reveal that 35.9% of loans are linked to MCLR. Experts points out that if the interest rate keeps dipping (as is the situation now), having the loan rate pegged to the Repo rate would ensure a faster devolution of benefits. Therefore, a borrower can op for a refinancing option where an MCLR based loan can be replaced by an external benchmark lending rate based loan. It will immediately save interest costs. Repo rate-linked loans are more transparent too. However, prepayment of loans could involve additional costs and the net impact of the switch must be carefully evaluated by the borrower.
While those with interest rate on their home loans tied to the MCLR (Marginal Cost of Funds based Lending Rate), base rate, BPLR (Benchmark Prime Lending Rate) might not benefit automatically from the RBI cut of 50 basis points, those with loans tied to the Repo Rate will be more fortunate. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
