<div><em>With most banks having transmitted the rate cut benefit to consumers, the leeway to cut more still exists, writes <strong>Sunil Dhawan</strong></em></div><div> </div><div>Here’s what has changed for all those who are servicing loans and paying EMIs. With Reserve Bank of India reducing the policy rate by 50 basis points on 29 September, the quantum of the fall stand at 1.25 per cent over the last 12 months. The repo rate currently stands at 6.75 per cent, down from 7.25 per cent earlier, while it was 8 percent exactly a year ago. Loans are linked to base rate of banks which in turn depends on repo rates. </div><div> </div><div>Over the last 24 hours, SBI, Axis bank, UCO, OBC, Andhra Bank have already reduced their base rate. HDFC incidentally had cut its base rate on 1st September. Overall, the cut is anywhere between 0.1 to 0.4 per cent, thus leaving a room for further cuts. </div><div> </div><div>Home loans being a secured mortgage, the interest rate is the lowest when compared to personal and auto loans. In case of personal loans and auto loans (typically 0.35 per cent higher than base rate), they are largely on fixed interest rates. Hence, the impact of base rate cut on them is marginal. </div><div> </div><div>Once repo rate (rate at which bank borrower funds from RBI) falls, cost of funds of bank’s reduces, although not necessarily by same proportion. When cost of fund reduces, it gets reflected in the banks base rate. Bank base rate is the rate below which they cannot lend money to corporates, individuals or whoever looking to borrow money from banks. Cut in repo rate therefore calls for a reduction in base rate. </div><div> </div><div>The impact of repo rate cut on the home loan market is two-dimensional. One, it brings relief to existing home loan takers who are paying flexible interest rate while the other dimension is how far will it impact new home loan takers. The latter, in turn depends on other factors including fair property values and the general sentiment in the economy. Until buyers of new property finds value in new homes and the economic sentiment picks up, the repo rate cut may not serve the purpose to its fullest. Yes, for those sitting on the side lines, having selected the home, the time is ripe.</div><div> </div><div>Let’s see how a fall in base rate impacts home loan on flexible interest rate.</div><div> </div><div><strong>The Impact on Loan Tenure:</strong> 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. </div><div> </div><div><strong>The Impact on EMIs:</strong> The immediate and most visible impact is on the EMI’s. Let’s say the EMI on Rs 40-lakh loan for 15 years at 9.85 percent is Rs 42,618. If there is a 0.4 per cent decrease in home loan rate, the EMI falls to Rs 41,648, a cool savings of Rs 970 a month. </div><div> </div><div><strong>The Impact on Interest Burden: </strong>The bigger impact is on the total interest burden. In the example above, the total interest burden on the Rs 40 lakh loan if run till 15-years comes to Rs 36, 71,220. When rate falls from 9.85 to 9.45, a 0.4 percent reduction in rate translates into interest savings of Rs 1,74,000.</div><div> </div><div><strong>Existing Home Loan Holders:</strong> Existing home loan holders can have different options to approach the situation. If existing rate is still high, even after your banker has reduced rate, think of a switchover or refinancing. Refinance from another bank where the differential is at least 20 basis points. Do account for processing fees and any other charges while shifting loan from one bank to another. Most banks waive off processing fees during festive season.</div><div> </div><div><strong>What To Do</strong>: For someone with an existing a home loan, the benefit can be availed in two ways-- either EMI’s 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 may have to submit revised ECS mandate. As a new home loan taker, if you have already made up your mind and selected the home of your choice, it time to approach bank for the loan on flexible rate of interest. </div><div> </div>
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