Planning to buy a home ..!! Well, good news for them who feel the home loan rate of interest should be transparent and a bit low compared to the existing rate. The monetary policy committee of RBI reduced the Repo rate by 25 basis points ( bps ) to 5.75%. Since February 2019 the repo rate has been revised thrice by the central bank. Due to the decrease in the repo rate, the present rate of interest will be decreased. But the central bank wants all the lenders to be transparent in the process of passing on the benefit to all the borrowers.
Repo rate is the rate at which RBI lends money overnight to banks to meet their shortfalls. This is also an essential tool to control inflation as when there is a trend of inflation RBI increases the repo rate to reserve the excess borrowing by banks and this helps in reducing the excess money supply and vis-a-vis. Increase and decrease of repo rate are determining the rate of interest by banks to borrowers.
What would be the impact on home loan buyers when there is a change in the repo rate? Will the EMI reduce after the decrease in Repo rate? Of course, the new home loan buyers would be benefitted on the move with a lower rate of interest, but to the existing borrowers, the revision in rate will take place only when reset date arrives as banks have already fixed their benchmark rate which is MCLR. The EMIs are equally divided in values as per the agreed tenure, so a change in their EMI will only happen when their reset date arrives. However, an existing borrower can approach the lender to revise the rate paying a nominal charge as fixed by the lender
Banks have been in practice to lend on basis of the internal benchmark like MCLR determined by the banks themselves but RBI has not shown its satisfaction about the lack of transmission of the benefits despite a cut in repo rate thrice in recent past in the year 2019 itself. It has been the way that banks are aggressive and moving fast to revise the home loan rates when the RBI is raising the rate upward, whereas slow in revising when the rate is cut down.
SBI the largest bank in India has announced that it would offer home loan to customers linked to the repo rate. It is a great move and being a borrower you should look that the home loan product should be linked to repo rate instead of linking to MCLR. Customers should look forward to the frequent changes in the repo rate linked home loan products though volatile but it is quite transparent in nature. Another side the CITI Bank, a consumer division of financial services multinational Citigroup widely popular for its ease in customer service, offers home loan linked to an external benchmark such as 91- days treasury bill.
One of the biggest advantages to go with the lender who offers the home loan with interest linked to repo rate or any external benchmark rather than MCLR is that there will be no rate reset or revise period and quick in transmission. With the change in the repo rate, the benefit of change will automatically be passed to the borrower. But in case of MCLR linked home loan products the rate will be unchanged till the next reset period for let’s say six months or one year. So it is believed that home loan for a long tenure has never been a wise decision. But the early prepayment to principal outstanding or availing loan from lenders who offer repo linked rate in home loan could be a source to be debt free early. One should opt for a lender who offers MCLR basis rate to be reset in every quarter. Then only one can be benefitted as rates are excepted to come down in the future.
Now the time has arrived for customers who are planning for a home loan for the first time, they can compare the rate and can go for the best rate available with lenders. Why comparison is important because all housing finance companies are not in a healthy financial state hence the marginal cost of funds has risen.
So they may not pass on the benefit to customers. Existing home loan borrowers should compare the rate and may plan switch over to any of the lenders comparing the best lower rate of interest. One should go for a change to another bank or lender by looking back at the cost of shifting, existing rate and remaining tenure. If there will be gaining on the calculation with rate difference of 50 bps or above then it will be widely benefited to owns satisfaction.
If India’s largest bank SBI offers the new home loan linked with repo rate, then that will be quite transparent to borrowers and no doubt it will be cheaper compared to those lenders who offer rates based on MCLR. Though the repo linked rates will remain volatile still a customer could be benefited in the long run. If we have a glance at the statistical data analysis.
Home loan rate to come down – What is the impact of repo rate on the home loan buyers in India?
Planning to buy a home ..!! Well, good news for them who feel the home loan rate of interest should be transparent and a bit low compared to the existing r