Rupakumar Pradhan, CFPCM, CWM®

Personal Financial Advisor

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Repo Rate Cut Means For Your Home Loan EMI

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Repo Rate Cut Means For Your Home Loan EMI

Repo Rate Cut Means For Your Home Loan EMI
June 15
12:26 2019

Clients are asking about RBI’s recent repo rate cut and it’s impact on their home loan EMIs. In future, home loan EMI will increase or decrease? Is it good or bad for home loan EMI?

It’s a fact that all the financial headlines are linked to the recent monetary policy announced by RBI. Repo Rate cut!

What is Repo Rate?

RBI has two policy rates – the repo rate, at which it injects money into the financial system or lends money to banks, and the reverse repo rate, at which it sucks out excess money or borrows money from banks.

In simple language, the repo rate is the rate at which our banks borrow rupees from RBI.

If liquidity is abundant in the system, then reverse repo becomes the key policy rate, but when money is scarce and banks borrow from RBI, the repo rate is the policy rate.

Impact of the rate cut on your home loan EMI

Post the policy announcement, the repo rate stands at 5.75 per cent down from 6.00 per cent. Similarly, reverse repo rate has also been reduced to 5.50 per cent from 5.75 per cent.

In the previous monetary policy reviews, held in February and April 2019, RBI reduced the key policy rates by 25 bps each time. In the calendar year, the central bank has reduced the rates by 75 bps in total. One basis point is equal to one hundredth part of percentage.

This is good news for borrowers as EMIs (equated monthly installments) are likely to go down assuming banks will pass on the benefit of the rate cut.

How much will your home loan EMIs reduce?

Now, assuming that banks also pass on today’s reduction in repo rate by RBI, here is an example of how your home loan equated monthly installments (EMIs) are likely to be impacted:

Loan Amount (₹) – 50,00,000

Tenure (Years) – 20 (240 EMIs)

Current Interest Rate (%) – 8.6

Current EMI (₹) – 43,708

New Interest rate (%) – 8.35

New EMI (₹) – 42,918

Cut in EMI (₹) – 790

The country’s largest bank, State Bank of India, reduced its MCLR (marginal cost of funds based lending rate) by 5 bps across all tenors with effect from May 10, 2019. However, base rate at 9.95 per cent and benchmark prime lending rate at 13.80 has been kept unchanged since March.

From May 1, SBI has also linked interest rate on savings account with balances above Rs 1 lakh to repo rate. The interest rate on these savings account will be 2.75 per cent below RBI’s repo rate. Thus, these savings account holders will be earning less interest on their savings.

On the other hand, SBI borrowers having cash credit accounts, overdraft accounts with limit over Rs 1 lakh will be paying interest at the rate of 2.25 per cent plus repo rate. The reduction in repo rate means they will pay lower interest rate on their borrowings.

Here’s what different types of borrowers can do post the third consecutive rate cut.

For new borrowers

RBI deferred its plan of linking loans to an external benchmark instead of the existing linkage to MCLR. Therefore, as a new borrower, loans will continue to carry interest rates linked to MCLR. As the central bank has cut the rate for the third time, it is likely that banks will also lower their MCLR.

You can also avail the benefit of credit subsidy available under the Pradhan Mantri Awas Yojana (PMAY). Middle income group – I (MIG -I) with household income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 per cent whereas middle income group – II (MIG -II) with household income between Rs 12 lakh and 18 lakh will get interest subsidy of 3 per cent.

The benefit of interest subsidy for both the groups is available till March 31, 2020.

The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for the bank. MCLR actually describes the method by which the minimum interest rate for loans is determined by a bank – on the basis of marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.

Existing borrowers

Existing home loan customers may have to wait a while to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period, which is typically 6 months or 1 year.

1)With loans linked to MCLR
Although the three repo rate cuts this year is good news for borrowers, understandably you will only see a decline in your EMIs after your bank lowers its MCLR. Further, the reduction in MCLR will result in lower EMIs only when the reset date of your home loan arrives.
Usually, a bank offers loan with reset period of six months or one year. On the reset date, your future EMIs will be calculated on the basis of the prevailing interest rate (bank’s MCLR plus margin of the bank) on that date.

2)With loans linked to base rate or BPLR
If your home loan is still linked to base rate or BPLR, then you should consider switching to an MCLR-linked loan. This is because MCLR offers better transparency and transmission of policy rates in comparison with base rate and BPLR rates, as per industry experts.

As per RBI guidelines, all the loans disbursed on or after April 1, 2016 are to be linked with MCLR. Borrowers who took loans prior to April 1, 2016 can either switch to MCLR with the same bank or transfer to another bank.

Benchmark Prime Lending Rate (BPLR) is the rate at which commercial banks charge their customers who are most credit worthy. According to the Reserve Bank of India (RBI), banks can fix the BPLR with the approval of their Boards.

So your loan rate will go down only after six / twelve months even if your bank reduces the MCLR rate today.

“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.” ~ T.T. Munger

I am a CERTIFIED FINANCIAL PLANNERCM, CHARTERED WEALTH MANAGER®. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 20 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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