Mortgage EMI: Will the interest rate fall below 7% for all borrowers even as the RBI keeps the repo rate constant?
Mortgage rate: Those who pay EMIs on their loans, like a home loan or car loan, may not have much to celebrate. The Reserve Bank of India (RBI) kept the repo rate constant in its August 2020 monetary policy.
However, borrowers can still expect relief from the cuts announced earlier by the RBI. Several banks have recently reduced their borrowing rates related to MCLR and pensions.
“The pause in rate cuts is also explained by the previous transmission of rate cuts to consumers via mortgages. In response to the cumulative rate cut of 115 basis points announced since February 2020, banks have already passed 70 to 90 basis points in their mortgage portfolio, being the fastest pass “, said Ramesh Nair, CEO and Country Manager (India), JLL.
The RBI has also taken other steps to ensure liquidity and keep rates low. “As the liquidity of the system is important to allow financial institutions to pass the benefits of lower RBI rates to the borrower with reduced interest rates, the Additional Special Liquidity Facility (ASLF) is thus considered a welcome step. The Rs 5,000 crore ASLF at the National Housing Bank will provide much needed amortization to housing finance companies to lower house interest rates. This will result in an increase in demand with a lower cost of credit for the home buyer and materialize in a likely increase in the consumption of residential inventory, especially as the festivities in the country approach, ”he said. said Rohit Poddar, MD, Housing and development of Poddar.
If you are a borrower with a loan linked to the marginal cost of funds (MCLR) lending rate, any drop in MCLR will help you pay lower IMEs on your loan as they reset. Some banks also reduce the term of the loan.
“More than the policy rates, it is the additional measures announced by the governor of the RBI which are a welcome decision and which will contribute to the economic recovery,” said Sameer Kaul, Managing Director of TrustPlutus Wealth Managers (India) Private Limited.
On new loans, including mortgage and car loans, sanctioned from October 1, 2019, the interest rate is linked to an external reference, which for most banks is the RBI repo rate.
Currently, mortgage interest rates for new borrowers start from 6.7 percent, however, for majority of borrowers depending on loan amount, occupation, gender, etc., it is by 7 percent or even more. It remains to be seen when the mortgage interest rate will drop below for the majority of borrowers.
If you are looking for the best interest rate for a home loan, these lenders can be explored – SBI HDFC home loans and home loans are available from 6.95 percent while Housing finance for LICs, Union Bank of India and Bank of India offer home loans with interest rates below 7 percent.
The SBI 1 year MCLR has declined as follows in recent years:
- July 2016: 9.15%
- July 2017: 8.00%
- July 2018: 8.25%
- July 2019: 8.40%
- July 2020: 7.00%
Let’s take a look at how a 100 basis point or 1% reduction in the mortgage interest rate affects your IME and the total cost of interest.
Assuming one takes out a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:
- NDE saved – Rs 1860 (Rs 22,320 annually)
- Total Interest Saved – Rs 1.87 lakh
The repo rate remains at 4 percent while the repo rate is 3.35 percent. The repo rate is the rate at which banks borrow money from the RBI. Thus, the lower the repo rate, the lower the cost of funds for banks, which in turn are able to pass the lower rates on to borrowers.
Since February 2019, the repo rate has been lowered seven times by the RBI, thus lowering the rate by 250 points cumulatively. However, the average MCLR – an indicator of banks’ cost of funds – is down around 155 basis points.
If you have the mortgage linked to the MCLR, it can be transferred to the RLLR. However, before doing so, assess whether this will be the right decision as RLLR is only suitable in a scenario of falling interest rates.