On 4th of October RBI cuts the REPO rate by 0.25%, but the bank has chosen to keep the CRR rate same as the previous years. Previously the REPO rate was 6.50% now it has been changed to 6.25%. This entire modification is done keeping in mind the inflation data and the slow growth rate. How the banks act in response when they will have to cut off their lending rates is yet to be seen.
Starting from month of January of the previous year RBI has slashed the REPO rate by 1.50%, accordingly banks reduced their lending rates by 0.5% approximately. Speaking about the definition REPO rate is a rate of interest at which banks borrow capital from RBI, whereas CRR is basic amount of capital or gold asset which Banks have to park mandatorily with RBI. With both these tools RBI controls entire Indian money market. On the basis of the economical situation of the capital market RBI utilizes its ultimate power of injecting and squeezing to control the liquidity in Indian economical market.
After-effects on home loan borrowers
The current reduction of 0.25% in REPO rate may be at the no harm no foul state going by the current money market, but if it goes on falling over a period then banks will have to no other choice rather than passing on the benefits, the end shock could be vast. Each bank stores large amount of savings in the interest for long-term value.
With the reducing lending rate borrowers will gain on their existing home loans. On a home loan of 40 lacs for 15 years at 9.5% interest the entire interest load can be lessen by close to 1 lac in the year, if the lending rate again falls by 0.25% then also the profitable amount will be around the aforementioned. Here’s the chart on how much you can save on some home loan amounts-
Impact of rate cut: How much one can save in interest (for a 15-year loan tenure)
| Loan Amount | EMI @ 9.5% | EMI @ 9.25% | EMI Saved(RS) | Interest Saved(RS) |
| Rs 25 lacs | 26,105 | 25,730 | -375 | 67,645 |
| Rs 50 lacs | 52,211 | 51,460 | -751 | 1,35,291 |
| Rs 75 lacs | 78317 | 77189 | -1128 | 2,03,000 |
Monitoring from bank’s perspective
Every single loan with elastic interest rate counting home loans, borrowed after 1st April 2016 will be connected with the banks’ marginal cost of funds based lending rate (MCLR), before this period those were part of banks’ base rate. People who borrowed the loan before April will get only one chance to switch to the MCLR rates. Presently one year MCLR is about 9-9.5% for most of the banks.
ICICI Bank’s 1-Year MCLR is currently (of use October 1, 2016) at 9.05 per cent, while home loans are offered at 9.35 per cent (9.3 per cent for women borrowers). State Bank of India’s MCLR is at 9.05 per cent, while home loan rate is 9.3 per cent (9.25 per cent for women borrowers). Interestingly, 1-Year MCLR for ICICI and SBI on 1st April was 9.20 percent. After that, it has come down by 0.15 percent. MCLR linked home loans are either set every 6 months or a year after.
New home loan takers it’s the ideal time to bargain with the construction company any invest in newly built flats in Kolkata
EMI per lac at different interest rate
| Tenure | 9.5 | 9.4 | 9.3 | 9.25 |
| 180 months | 1044 | 1038 | 1032 | 1029 |
| 240 months | 932 | 926 | 919 | 916 |
| 360 months | 841 | 834 | 826 | 823 |
In the table above: a home loan amount of Rs 36 lac at 9.25 per cent for 15 years, the EMI will be (1029 * 36 lac) / 100000 = 37,044 calculated.
A borrower can choose among these options before borrowing home loan
- Reduce EMI
- Reduce tenure
- Transfer loan to another lender
But in each of the cases he will have to keep a track on the total interest saved. If the ongoing loan is about to end the impact of rate change may affect much.
By LNN (Liyans News Network)