Interest Rate Cut – In Favour of Home Loan Borrowers

With rising property price, buying a home on lump-sum payment is almost impossible. In such a case, the list narrows down to Home Loans. While getting a good Home Loan is important for first time buyers, the existing buyers wish to benefit from their current Home Loan plans.

One of the key players in the whole Home Loan concept is the Home Loan interest rates. Let us first talk about types of housing loan interest rates.

 

  • Fixed Interest rate: A fixed interest rate will not change during the entire Home Loan tenor. While this type of interest rate is not affected by market fluctuations but it offers certainty in the knowledge of repayments.
  • Floating Interest rate: A floating interest rate fluctuates as interest rates in the market change. They offer flexibility to make lump sum repayment of any type at any time without penalty.

 

Some recent modifications in the market policies:

  • The new year started on a high note for borrowers.
  • Recently the cut down in interest rates is by 0.25% by the Reserve bank of India (RBI), is likely to translate into lower interest rate for Home Loans.
  • The current RBI repo rate of 6% is the lowest in nearly seven years since November 2010. As a result, some banks have started reducing their interest rates.
  • State Bank of India (SBI) now offers Home Loans at 8.65% instead of 9.15%. With a reduction in housing loan interest rates by various banks, the Home Loan interest rate in India has come down by an average of about 0.4-0.5%.

So, now let us see how the interest rate cut favours borrowers:

Here’s how the interest rate cuts will benefit different type of borrowers:

New or recent borrowers:

  • Increase in eligibility of new borrowers with interest rate drop by 50 basis point – A borrower with an income of 1 lakh was eligible for a Home Loan of INR 55 lakh with an EMI of 50%. The same borrower is now eligible for a Home Loan of INR 58 lakh.
  • The reduction in interest rates can reduce the number of years remaining to repay the loan. For instance, a 25-year tenor would be brought down to 22-year tenor after the 50 bps revision.
  • MCLR based borrowers – for the new Home Loan borrowers there aren’t immediate benefits from the interest cuts. However, once the reset date approaches, the borrowers can benefit from the lower housing loan interest rates which will impact EMIs.

Old borrowers or base rate borrowers:

  • Switch to MCLR –for those who have taken Home Loans before April 2016, and after July 2010, the loans are linked to bank’s base rate, and the interest rate is around 10%. The average MCLR has fallen to about 8.75 percent after the recent rate cuts. Through this difference of 1-1.25 percent in base rate and MCLR, borrowers can switch to MCLR and save on total interest outgo.
  • Switching to another loan plan is especially favourable to existing buyers as they can benefit from the current interest rates.

Floating Home Loan borrowers:

  • As the floating interest rates change with the interest rates prevailing in the market, all the borrowers with Home Loans at floating interest rates can highly benefit from the current interest rate cut.
  • The reduction in Home Loan interest rates by most of the banks can prove to be a source of savings as the EMI amount will drop down.

Home Loan EMI calculator:

To understand the role of the interest rate on Home Loans, you can use a Home Loan interest rate calculator. This tool can help you calculate Home Loan EMI based on loan amount, tenor and interest rate. Moreover, through a housing loan interest calculator, you can analyse interest and outstanding principal repayments.

The current market scenario offers myriad opportunities for getting a financial relief and increase savings. Hopefully, you will make the best out of favourable situations and make your Home Loan plan smart, efficient and beneficial.

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arwindsharma

Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.

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