The Reserve Bank of India reduced its repo rate yet again this week. With the 25 BPS reduction, the repo rate now stands at 6%. This is the seventh time the RBI has reduced the lending rate since mid-2014 in response to various macroeconomic factors.
Not just that, banks too are proactively reducing their lending and deposit rates. The State Bank of India slashed its deposit rate by 50 BPS to 3.50 recently. This was even before the RBI had announced a rate cut. SBI also slashed its Home Loan rate to 8.35% in the recent past, just above its one-year MCLR of 8%.
This is great news for everyone repaying their Home Loan or looking to take one. For the former, the rate cuts have translated into lower EMIs and higher long-term savings. For the latter, there’s now the possibility of taking out bigger loans and incurring lower interest costs to make their dream of purchasing a house a reality.
Impact of rate cut on customers
For Existing Loan Holders – Transfer or Prepay
In the light of RBI’s latest repo rate cut, banks and NBFCs may soon announce their round of rate reductions. If you’re repaying a Home Loan, albeit not at a competitive rate of interest, you have two options to make your loan cheaper.
The first option is to make the switch with your existing lender. If you’re repaying your loan at a fixed rate of interest (linked to the base rate regime), you may be shelling out a significantly higher amount of money towards interest payments.
This will make your loan more expensive than loans linked to the MCLR calculation. All floating interest rate loans issued since April 1, 2016, are linked to the MCLR, which is a more responsive and transparent interest rate regime. For MCLR loans, the intervals of automatic interest rate resets are pre-defined in the loan agreement.
If you plan to switch your loan with your existing lender, you can ask for a waiver of processing or transfer fees. This decision, however, rests solely with the bank.
The second option is to switch to another lender. Again, the points of MCLR hold true. You can also switch from a bank to an NBFC or vice versa. For this outward transfer, you will incur processing and transfer fees.
In both options, you must weigh your transfer costs. If these do not exceed interest savings and tax benefits, then you should make the transfer. A calculated move may save you several lakh rupees in the long term if you’ve just started repaying your loan. However, if you’re nearing the end of your loan repayments, you may want to stick with your ongoing loan for tax benefits.
Secondly, if you’re happy with the interest rate you’re paying, you should consider making principal pre-payments to reduce your loan balance. When the interest rates are trending low, it is the best possible time to make prepayments. Pre-paying your loan at a lower interest rate will help you save heavily in the long run, as compared to pre-paying it at a higher interest rate.
For New Loan Seekers
The prospect of falling interest rates is a good boost to the confidence of property buyers, who have also benefitted from the arrival of the Real Estate Regulation & Development Act. There’s never been a better time to go for your dream home.
Loan seekers can now take on bigger loans to fund bigger property purchases. Before you start your loan hunt, you may want to get a free check on your Credit Score, which is becoming increasingly important for getting the best loan deals.
Lastly, before you finalise a loan, go online and compare all your options from various banks and NBFCs.
(The writer is CEO, BankBazaar.com)