RBI Cuts Repo Rate, How Much Would You

Save On Home Loan?

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 banks 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 1 st
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 onetime 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 cuts 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 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 wont 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 ones 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.
You can also read Rate Cut is a Festive Gift- says Car, Consumer Durable Makers

Disclaimer
The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the
research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making
investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Article Written by
Salman Hashmi