A ‘New Year Gift’ for Home Loan Borrowers

The New Year 2017 definitely started on a high note for all home loan borrowers. With ample of funds in the banks after demonetization, banks have announced a reduction in their lending rates. Many banks are offering home loans at 8.65 per cent as against 9.15 per cent for all borrowers except women who have an additional relief of 5 basis points (bps).

Who will benefit from the rate cuts?

The current rate cuts will undoubtedly benefit new home-loan borrowers as these rates will naturally apply to them. Then what about the existing borrowers? Will they also benefit from these falling rates?

If existing borrowers are on Marginal Cost of funding Lending Rate (MCLR), they will have to wait until the next reset period since the interest rate is subject to changes at fixed intervals as per the tenure for which rates are linked. For example, some banks reset the rates annually while some do so every quarter.

This change in interest rates will result in reduced tenure and not a reduction in EMI. For example, if your tenure for a Rupee 75 lakh loan at 9.15 percent was 25 years, after 50 bps, it will come down to 22 years. Remember, this will only apply if you have opted for a loan with a floating rate of interest. If you have taken a loan with a fixed rate of interest, your payments will remain unaffected by rate cuts.

The MCLR system was adopted by banks from April 1, 2016, replacing the base rate system. So, borrowers who had taken home loans before April 2016 will have their EMIs linked to the base rate. In such cases, these borrowers will have to either enter into a fresh contract with their bank to get their loans linked to MCLR, or they should wait till their lender reduces the lending rate for them too. Though later, usually does not happen, it’s better to shift their loan to another lender by paying the required fee.

Increase in eligibility: With a 50 bps drop in interest rate of home loans, new borrowers will also see an increase in their eligibility. For example, a borrower earning Rs 1 lakh was eligible for a home loan of Rs 55 lakh (if the lender capped an EMI of 50% on monthly income) for 20 years. The same individual is now eligible to get Rs 58 lakh.

Home-Loans from non banking institutions: Since the rate cuts have been limited to public and private banking institutions, customers of non-banking institutions will largely remain unaffected by these rate changes. However some of the non-banking institutions have revised the interest rate on home loans with a reduction of 15 bps, benefitting new customers as well as existing customers with floating rates of interest.

This reduction in lending rate (recorded lowest in the past 6 years) will surely help the new and prospective home loan borrowers to consider opting for their dream home instead of waiting for rates to fall any further.