Benefits For Home Loan Buyers As Banks Reduce Base Rate

With Axis Bank, India’s third largest private sector bank by assets, lowering its base rate by 0.1 per cent to 9.85 percent on Friday (26 June), the writing on the wall is crystal clear. Interest rates are on the down side now with country’s all leading the banks including SBI, ICICI and HDFC having already cut their base rates earlier in June. Home loan buyers are set to gain in servicing their EMIs.  It was imminent for the lending rates to fall with RBI already announcing policy rate cut since beginning of this calendar year and also pushing the banks to cut rates too.  Axis Bank’s reduction follows rate cuts by ICICI Bank and HDFC Bank earlier this month. ICICI Bank reduced its base rate to 9.70 per cent while HDFC Bank had reduced its base rate to 9.70 percent too.   The Impact: A 0.25 per cent reduction may not appear to be a big advantage but over period of time if rates keep falling and banks continue passing on the benefit, the cumulative impact could be huge. Let’ assume, outstanding amount on a home loan is Rs 10 lakh, with 20 years remaining and at an interest rate of 10.50 percent at an EMI of Rs 9,983. If rate falls by 0.25 percent, keeping the EMI constant, the tenure falls by about 13 months.  If the rate is reduced by 0.5 percent, the effect translates into nearly 24 months and you would end your loan much earlier.  What to do: When bank base rates fall, those holding home loan on flexible interest rates benefits as against those holding fixed home loans. Most banks have passed on the benefit of lower base rate to their home loan customers. For someone with an existing a home loan, the benefit can be availed in two ways-- either EMIs may be reduced or the tenure may be reduced. Banks on their own typically reduce the tenure automatically and thus transfer the benefit of lowering base rate to their customers. Ask your banker, how has the adjustment been done or log on to your home loan account online to see if the benefit has been passed on to your account.  If you wish to lower your EMI, you need to contact your banker and submit revised ECS mandate. If the existing loan is nearing completion, the impact of base rate change may not be much. Ideally, if your exiting loan is around three years old, consider switchover or lowering the tenure.  The base rate may further witness a fall this year. If you are contemplating switchover, getting a new loan or bringing a change in your existing loan, it could be better to wait a little more. The margin to cut rates still exists and don’t be surprised to see further lowering of rates in near future.