Banks cut lending rates: How home-loan borrowers will benefit

A slight revision of 50 bps point can increase eligibility for new borrowers

For borrowers, the new year definitely started on a high note. Flushed with funds after demonetisation, banks have started reducing their lending rates. Punjab National Bank, the Union Bank of India and the State Bank of India (SBI) has already announced a cut in their benchmark lending rates.

Consequently, SBI has reduced its home loan rates by 50 basis points (bps) for loans up to Rs 75 lakh. 

The bank now offers home loans at 8.65 per cent instead of 9.15 per cent for all borrowers except women who have an additional relief of 5 bps.

New borrowers will see an increase in their eligibility with the 50 basis point drop in interest rates for a home loan. A borrower earning Rs 1 lakh was eligible for a home loan of Rs 55 lakh for 20 years if the lender capped an EMI of 50 per cent on the monthly income. The same individual can now get Rs 58 lakh for home loan. For a 25-year-loan the eligibility goes up to Rs 62 lakh from the earlier Rs 59 lakh.

For existing customers who would benefit from this, the revision in interest rates can reduce the number of years remaining to repay the loan significantly. If your tenure was hiked to 25 years for a Rs 75 lakh loan at 9.15 per cent, after the 50 bps revision it would be brought down to 22 years.

Banks do not change the equated monthly instalment of customers. Instead, they change the tenure whenever there’s a revision in interest rates. Similarly, if you had the same loan for 20 years, the repayment tenure would now be 18 years.
 

However, home loans linked to the marginal cost of funding lending rate (MCLR) may not see an immediate revision.

There is no standard time frame across banks to revise loans linked to MCLR– some revise rates every quarter, while others may change rates after a year. So, when rates are falling, borrowers won’t get an immediate benefit.

However, when the rates are rising there will be a delay in resetting interest rates. Experts say that in the current period, it is better to opt for a bank that has a quarterly revision of MCLR.