How interest rate reduction of 90 basis points translates for a home loan availer

MUMBAI: The lending rate cut by State Bank of India is good news for borrowers, especially customers with long-term home loans of 20-25 years. In one swoop, the 90 basis points rate cut has reduced the tenure of a 25-year home loan by almost five years. Banks don’t change the EMI amount when rates change, but alter the tenure of the loan to align with the new rate. A 20-year loan is now shorter by almost three years. But loans which are nearing their end may not be affected so much.

Moreover, home loans linked to the marginal cost of funds lending rate (MCLR) may not see an immediate rate revision. The periodicity of the rate revision varies across banks. Some lenders reset their rates every quarter, but others could wait for up to a year to make the change. This works both ways for borrowers. In a falling rate regime, it is better to go with a lender who resets the rate very often (every quarter or so).

But when interest rates are rising, a slower revision in the lending rate protects the customer from the rate hike.

Though many loans taken before April 2016 continue to be linked to the base rate, experts recommend shifting to the new MCLR. They say banks are flush with demonetised deposits, so the MCLR will only fall further. Borrowers will pay a conversion fees for switching to MCLR, but this cost would be recovered in no time due to the lower EMI. Those with long term loans should actively consider this in the New Year.

Before SBI announced the cut, IDBI Bank had cut lending rates. Now, other banks will have no choice but to follow suit. If your home loan provider does not cut rates as expected, switch to a bank with a lower rate. You will have to do the paperwork (applying for a new loan and foreclosing the existing one) but the savings in EMI will be enormous. A customer with a Rs.50 lakh loan for 25 years will save more than Rs.3,000 every month if his EMI is lowered from 9.15% to 8.25%.

Credit ET Realty

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