Home Loan: Know the impact on your EMI as RBI maintains repo rate
As widely expected, the Reserve Bank of India (RBI) has kept the policy repo rate unchanged at 5.15 per cent. For home loan and other borrowers, there may still be some relief expected in the coming months. Several banks have recently cut their 1-year MCLR on which the home loan interest is based upon. A lower Marginal Cost of Funds based Lending Rate (MCLR) will help borrowers pay lower EMIs on their loans as and when their reset-period comes up. The impact of repo rate revisions does have an impact on home buyers. “The real estate sector has been in particular benefitting from rate cuts which were transmitted to some extent through mortgage rates and repo linked loans to end consumers. The RBI’s move today to ease rules for projects delayed for reasons beyond the control of promoters by one year will provide the much-needed elbow room for developers,” says Ramesh Nair CEO & Country Head, JLL India.
However, MCLR-linked home loans are applicable to those who had taken loans before October 1, 2019, and after April 1, 2016. For them, there is a 12-month reset period and, thus, any recent decision of the RBI may not have an immediate impact.
RBI’s Monetary Policy Committee (MPC) in its sixth Bi-monthly Monetary Policy Statement, 2019-20 on February 6, 2020, has kept the repo rate unchanged.
Currently, (from October 1, 2019) the loans offered by banks are linked to an external benchmark, which for most banks is the RBI repo rate. As and when there is a revision in the repo rate, the home loan interest rate for the borrower gets revised within three months. The transmission, therefore, is expected to be faster in repo linked home loans than on the loans linked to MCLR – an internal benchmark of banks.
So, while borrowers on repo linked lending rate (RLLR) see no change in their EMI’s, after today’s announcement, those paying home loan EMI based on MCLR, may still an impact on their EMI. Either their EMI’S will come down or the tenure of the loan will become less.
Let us see how MCLR has come down over the last 12 months for some leading banks. According to data shared by RBI, the median 1-year MCLR of public sector banks since January 2019 has fallen from 8.75 per cent to 8.28 per cent as on January 2020. The median 1-year MCLR of private sector banks has fallen from 9.3 per cent to 9.13 per cent over the same period.
MCLR linked home loans have a reset period of typically 12 months. It means for someone who had taken a home loan in February 2019, the home loan rate of interest will be revised in February 2020.
Among the leading banks, SBI 1-Year MCLR has fallen from 8.55 in January 2019 to 7.9 per cent in January 2020. Similarly, 1-Year MCLR of ICICI bank has fallen from 8.80 in January 2019 to 8.20 per cent in January 2020.
Saving in interest cost
Let us how a 60 basis points or 0.6 per cent cut in home loan interest rate impacts your EMI and total interest cost.
Assuming one takes a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:
EMI Saved – Rs 1224 ( Annually Rs 14,688)
Total interest saved – Rs 2.20 lakh
If you are looking for a new home loan, there are two things to know from the bank – the bank’s RLLR or the external benchmark rate (EBR) and the actual spread or margin for you. The effective home loan interest rate will be important for you while comparing the home loan rate of interest with other banks.
While, if you are still, on an MCLR linked loan, you may either continue or switch to RLLR home loan with the same bank or another bank. No matter, whether it is an MCLR or RLLR home loan, make a plan to prepay the entire loan as quickly as possible to save interest cost.