Home loans to become cheaper

Existing and new customers will find it easier to manage or raise loans as banks start cutting rates

The Reserve Bank of India (RBI)’s repo rate cut on Tuesday has brought cheer to both existing and new home loan borrowers. After the 50-basis point cut by the central bank,  State Bank of India (SBI), Axis Bank, Bank of India and Andhra Bank have cut their base rates. This means a reduction in all lending rates, linked to base rates.

Existing borrowers who have opted for floating rate loans will automatically see a reduction in their equated monthly instalments (EMIs). Most banks offer only home loans on a floating basis. Therefore, only in case of home loans do existing borrowers stand to gain. Since most banks give personal and automobile loans on a fixed basis, only new borrowers will benefit from the base rate cut.

“Customers of property-backed loans will gain the most, because their rates are usually at base rate. Other loans are marked up over the base rate,” says Vineet Jain, co-founder and chief executive officer (CEO) of Loanstreet.in.

SBI has cut its base rate by 40 bps to 9.3 per cent. This brings down the rate on home loans to 9.35 per cent from 9.75 per cent. The EMI for a Rs 50-lakh 25-year loan at 9.75 per cent is Rs 44,557 and the total interest is Rs 83,67,061. The EMI for a Rs 50-lakh 25-year loan at 9.35 per cent is Rs 43,165 and the total interest is Rs 79,49,386. The total savings in terms of interest if you service the loan over the entire period would be Rs 4,17,675.

 

One thing to consider is whether to keep your EMI constant and reduce the overall tenure or lower the EMI and keep the tenure constant. While reducing the tenure will lower the total interest outgo, many borrowers prefer a lower EMI. “A home loan is the cheapest loan. It also gives tax benefits. So, if you have the opportunity to invest the money you save by way of lower EMI, you can consider that,” says Ranjit Punja, CEO and co-founder, Creditmantri.com.

 

A lot of borrowers would look to re-finance loans or transfer the balance when interest rates fall. But before you do that, check the processing fee, which is normally a percentage of the loan outstanding. “The processing fee should be higher than what you will save over the tenor of the loan,” points out Punja.

 

Another benefit of falling interest rates is that borrowers can opt for a higher loan amount at the time of shifting. Banks will agree to increase the amount provided you have sufficient number of years before retiring. For instance, if you are 45 years and have 15 years of your 20-year loan remaining, you can shift your loan easily and even take a higher amount. As your salary would have increased from the time you started the loan, your repaying capacity, too, would have risen. But if you are 55 years, shifting a loan and getting a higher amount might not be that easy.

However, while buying property, it is important to consider the value of the property and the immediacy of your need, rather than the interest rate. While a lower rate will definitely make it more affordable, it does not make sense to buy if the property is over-priced.

Property prices are expected to come down since RBI has also proposed to reduce the risk weights applicable to lower-value homes (affordable housing). Once detailed guidelines are out, banks might lower the loan rates to builders in this segment. This could, in turn, bring down property prices in this segment.