On Wednesday, the country’s largest lender State Bank of India announced a cut in its interest rate on home loans to 9.1 per cent for women and 9.15 per cent for others, a six-year low. A day later, on Thursday, ICICI Bank revised its interest rate offering on home loans and brought it down to 9.15 per cent for women and 9.2 per cent for others. HDFC Bank, too, cut slashed their home loan rates by 0.15 per cent. Home loans up to Rs 75 lakh for women borrowers will now attract an interest of 9.15 per cent and for others it will be 9.20 per cent, HDFC Ltd said in a statement on Thursday. For loans beyond Rs 75 lakh, the interest rate has been revised downwards to 9.25 per cent for women borrower and 9.30 per cent for others.
While it is good news for just SBI, HDFC Bank and ICICI Bank customers for now, industry insiders believe that the market dynamics and competition within the space will make sure that other players follow suit and bring their interest rates down soon. The 15 basis point cut by SBI follows the 25 basis point cut in repo rate by the Reserve Bank of India in October 2016. The aggregate cut in the home loan interest rate by the bank over the last 20 months now stands at over 100 basis points and is a reflection of the 175-basis point cut in repo rate by the RBI since January 2015. While it may be argued that the transmission by banks has not been full and has come with a lag, a 1 percentage point cut in home loan rates means a saving of Rs 3,300 per month in EMI on a Rs 50 lakh, 20-year loan for new customers.
What it means to you
While a new customer saves around Rs 3,300 per month as against what he would have paid 20 months back (for a Rs 50 lakh, 20 year loan) on account of the reduction in lending rate, an existing home loan customer is not going to benefit from these revisions as they get the benefit only when the base rate is revised and not when the rate reduction is on account of cut in marginal cost of funds based lending rate (MCLR).
“Since the recent cut in lending rates have been on account of revision in MCLR, the existing customers will not get the benefit of recent revisions. The existing home loan customer will only benefit if there is a cut in the base rate or he chooses to convert his loan from old loan to a new loan with his bank/HFC by paying a conversion fee,” said a senior official with a leading home loan provider.
Different banks and housing finance companies charge anywhere between 0.1 and 0.5 per cent on the outstanding loan amount to shift the customer from old rate to the new rate. So a customer who took a loan 20 months back at 10.15 per cent can move to the new rate of 9.15 per cent (or other rate being offered) by paying a conversion fee at their bank.
Illustratively, if you are an existing customer who took a Rs 50 lakh home loan for 20 years in January 2015 at the then average offering rate of 10.15 per cent from a bank or housing finance company and currently your bank is offering a rate of 9.15 per cent to new customers then you can pay the conversion fee and shift your loan at 9.15 per cent. If your bank charges a conversion fee of 0.2 per cent then you would be required to pay around Rs 10,000 to convert your loan at the new rate. However, by doing so, the tenure of the loan comes down from initial 240 months to revised 202 months. Since 22 months have already gone past, an individual will save on 16 EMIs (240 months minus 22 months). Alternatively, the EMI can come down by approximately Rs 3,300 every month. However, experts say that the wiser call is to go for tenure reduction as it brings the interest cost down for the borrower.
“At the time of buying a house an individual generally draws down from all his savings and exhausts them. So for individuals who have exhausted their savings and don’t have contingency fund should look to reduce their EMI (on account of decline in interest rates) and use it to build contingency fund and taking other risk covers. However, those who have their risk cover in place should reduce their tenure,” said Vishal Dhawan, CFP and founder, Plan Ahead Wealth Advisors.
The State Bank of India in its press statement said that on a home loan of Rs 50 lakh, reduction in interest rate by 0.15 per cent will help a home buyer save Rs 542 per month, which will add up to approximately Rs 2 lakh during the loan tenure of 30 years. It further said, “Value of the savings on EMI of Rs 542 PM, if invested in a recurring deposit, will be approximately Rs 6 lakh at the end of the loan tenure.”