Borrowers paying EMIs on their floating interest rate loans have nothing to cheer about as the Reserve Bank of India (RBI) has kept the repo rate constant in its October 2020 monetary policy. However, the borrowers may expect some relief from the earlier cuts by the RBI as several banks have reduced their MCLR and repo linked lending rates in the recent past.
If you are a borrower with a loan linked to Marginal Cost of Funds based Lending Rate (MCLR), the fall in MCLR will help you pay lower EMIs on your loan as and when your reset-period comes up. ICICI Bank, Bank of India, Central Bank of India, and Union Bank of India are some of the banks which have seen a reduction in the MCLR over the past few weeks. With the upcoming festive season, banks are expected to cut the home loan interest rate further.
The RBI has also taken another important step. The differential risk weights are applicable based on the size of the loan as well as the loan to value ratio (LTV). The RBI has rationalised the risk weights by linking them only with LTV ratios for all new housing loans sanctioned up to March 31, 2022.
Such loans shall attract a risk weight of 35 per cent where LTV is less than or equal to 80 per cent, and a risk weight of 50 per cent where LTV is more than 80 per cent but less than or equal to 90 per cent. This measure is expected to give a fillip to bank lending to the real estate sector.
“In order to ensure higher credit growth even to the individuals and small businesses (i.e. with a turnover of up to Rs 50 crore), the limit for a maximum aggregated retail exposure to one counterparty has been increased from Rs 5 Crore to Rs 7.5 Crore. The RBI has also decided to rationalize risk weights of new housing loans till 31st March 2022, a move that is likely to help reduce home loan rates,” says Sameer Kaul – CEO and MD of TrustPlutus Wealth Managers (India).
Since October 1, 2019, loans, including home and auto loans, offered by banks are linked to an external benchmark, which for most banks is the RBI repo rate. Currently, the home loan interest rates for new borrowers start from as low as 6.7 per cent, however, for the majority of borrowers based on the loan amount, profession, gender etc, it is 7 per cent or even higher.
If you are looking for the best home loan interest rate, these lenders may be explored – SBI home loans and HDFC home loans are available from 6.95 per cent while LIC Housing Finance, Union Bank of India and Bank of India are offering home loans with rates of interest starting below 7 per cent.
The SBI 1-year MCLR has come down in the following manner over the last few years:
July 2016: 9.15 per cent
July 2017: 8.00 per cent
July 2018: 8.25 per cent
July 2019: 8.40 per cent
July 2020 to September 2020: 7.00 per cent
Presently, for the new borrowers, the SBI home loan interest is at a multi-year low. The previous low was seen around 2004 when the interest rate on home loans was around 7 per cent or even lesser than that. SBI home loans are available from 6.95 per cent to 7.35 per cent. The actual rate of interest for the borrowers depends on the gender, amount of loan, risk profile of borrower, profession and the tenure of the loan.
Currently, for SBI, the home loan is available to some categories at 6.95 per cent. The SBI EBR since July 2020 is 6.65 per cent and for loans below Rs 30 lakh, there is a ‘Margin’ of 35 basis points or 0.35 per cent. So, effectively, the rate becomes 7 per cent. However, for women borrowers, there is a concession of 5 basis points. Hence, the effective rate of interest comes to 6.95 per cent for those borrowers.
The repo rate stays at 4 per cent while the reverse repo rate is at 3.35 per cent. Repo rate is the rate at which banks borrow money from the RBI. So, lower the repo rate, lower is the cost of funds for banks which in turn are in a position to pass-on the lower rates to the borrowers.
Let us see how a 100 basis points or 1 per cent cut in home loan interest rate impacts your EMI and total interest cost.
Assuming one takes a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:
EMI Saved – Rs 1860 ( Annually Rs 22,320)
Total interest saved – Rs 1.87 lakh
EMI restructuring scheme
While the six months RBI EMI Moratorium scheme had ended on August 31, 2020, the resolution framework offered by banks is open for the borrowers to restructure their loans. Those borrowers who are finding it difficult to pay the EMI’s on their home loan, car loans or personal loans, may avail the restructuring of the loan. SBI has already initiated the process and one may apply for the restructuring of loans by visiting the bank’s website or approaching the bank branch. However, not all may be eligible for this resolution and restructuring of their loans. One needs to check the eligibility as per the rules of the Resolution under this framework.
To avail the restructuring of loan, the SBI’s retail customers will have to log-in at the portal where they will be asked to key in their account number. After completion of OTP validation and inputting a few necessary information, the customer will come to know their eligibility. The restructuring process will be complete after verification of documents and execution of simple documents at branch/CPC.
The installments will get rescheduled and the extension of tenure will be for a period equivalent to the moratorium granted subject to a maximum of 2 years.
Such a restructuring is in addition to the EMI moratorium scheme that ended on August 31, 2020. The good news is that anyone can opt for it and not necessarily those who had availed the 6-months moratorium scheme since March 2020. The last date to apply for relief under the resolution framework is December 24, 2020.