With the Reserve Bank of India (RBI) cutting the repo rate to 4 per cent from the existing 4.4 per cent, the borrowers expect relief from the rate sensitive realty and auto sectors. The RBI lowered the repo rate by 40 basis points Friday after reducing it by 25 basis points mid-April and 75 basis points on March 27. The customers now expect the banks to pass on the benefits on their car loans, personal loans and home loans. If the banks pass on the benefit and slash the marginal cost of funds based lending rates (MCLR), it may have a direct impact on the amount of equated monthly installment (EMI) customers pay for their loans. MCLR is the minimum interest rate that a bank charges on the loan.
Here's all you need to know about impact of the rate cut on home loan EMI:
Assume a male (salaried) borrower has taken an SBI home loan of Rs 50 lakh for a twenty year-tenure, which currently carries an interest rate of 7.65 per cent. That means the EMI at present is Rs 40,739. But if your bank lowers its interest rate by 40 bps to pass on the complete benefit of the repo rate cut, at 7.25 per cent interest rate, your EMI will come down by Rs 1,220 to Rs 39,519. And the bigger the loan amount, more would be the benefit for the customers. For example, a home loan of Rs 75 lakh will see the EMI burden coming down by Rs 2,085 to RS 58,341 from current EMI of Rs 60,426.
Most home loans based on MCLR are linked to the bank's 1-year marginal cost of funds based lending rate (MCLR). In April 2019, SBI's 1-year MCLR stood at 8.5 per cent. It came down to 7.4 per cent as in April 2020, falling below 8 per cent for the first time in 15 years. Since October 1, 2019, the loans are being linked to the RBI's repo rate by the banks.
"Home loan interest rates have already gone down substantially over the last year, and are presently at an all-time low averaging between 7.15% to 7.8%. Today's repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market. Moreover, the repo rate cut may compel banks to reduce the interest rates for FDs even further - this could result in even more people leaning towards housing as a better investment option," Anuj Puri, Chairman, ANAROCK Property Consultants, said.
Commenting on the issue, Ravindra Sudhalkar, CEO, Reliance Home Finance, said, "The measures to extend the moratorium period by three months till August 31st will ease the stress on buyers and developers to honour their loan commitments. By allowing the accumulated loans to be converted to term loans, the borrowers will get more time to rework their financial obligations till the cash-flow situation improves. The repo rate cut by 40 basis points to 4% will encourage banks to increase their lending to HFC s and NBFCs. This will automatically translate into greater liquidity for the real estate sector and greater incentive for buyers to invest in properties".