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Repo Rates Cut 4 times a year, will your Home Loan rates fall?

IndianMoney.com Research Team | Updated On Tuesday, August 13,2019, 02:23 PM

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Repo Rates Cut 4 times a year, will your Home Loan rates fall?

 

 

Repo Rates Cut 4 Times a Year, Will Your Home Loan Rates Fall?

The Government and the RBI want your home loan rates to go down. The RBI has cut repo rate by 35 basis points from 5.75% to 5.4%. It continues to maintain accommodative stance. The RBI Governor Shaktikanta Das has asked private banks to pass on benefits of the repo rate cut.

Now, Prime Minister Narendra Modi has a message for banks. Banks must pass on the benefits of lower rates. There’s a question for you to ask. The RBI has cut repo rates 4 times a year. Then, why is your home loan not getting cheaper?

Want to know more on Home Loan? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

See Also: 4 Key Aspects To Consider Before Availing a Home Loan

Will Your Home Loan Rates Fall?

The repo rate stands at 5.4% which is the lowest since April 2010. The RBI has cut the repo rate by 110 bps since the start of this year. The purpose of all these rate cuts is to get the home loan rates down; before the festive season. This should be good news to you and scores of home loan borrowers. But, are banks transmitting the repo rate cuts to borrowers?

Banks Are Cutting MCLR

What is MCLR? Marginal Cost of Funds based lending rate or MCLR is the lowest rate at which banks lend. How is MCLR calculated?

To calculate MCLR, you need to know the tenor premium, marginal cost of funds, bank operating costs, and negative carry in maintaining CRR with RBI.

Tenor Premium: Tenor is the time left for loan repayment. Banks lend for a higher tenor and this means higher risk. Banks charge a tenor premium to make up for this risk.

Bank operating costs: This is the cost for providing the loan minus service charges.

Marginal cost of funds: The marginal cost of funds is the additional cost incurred by the bank; to fund the purchase of assets/make an investment.

Negative carry in maintaining CRR with RBI: CRR means the cash reserve ratio or the amount of cash that is reserved by the banks with RBI. CRR currently stands at 4%. The CRR is inversely proportional to the amount of money with the bank to be used for lending and investment purposes. (Banks cannot lend the money deposited with RBI as CRR).

Within hours of the repo rate cut, SBI India’s largest lender, cut repo rate by 15 bps across all tenors. HDFC Bank has cut MCLR by 10 bps. HDFC has also reduced MCLR by 10 bps. SBI MCLR rate is 8.25% for one-year tenor, from the earlier 8.4%.

SBI tenor-wise MCLR

Tenor

Previous MCLR %

Revised MCLR %

Over Night

8.05

7.9

1 Month

8.05

7.9

3 Months

8.1

7.95

6 Months

8.25

8.1

1 Year

8.4

8.25

2 Years

8.5

8.35

3 Years

8.6

8.45

Why Banks Are Not Passing Repo Rate Cuts?

Ideally, when RBI cuts repo rates, banks must cut MCLR. This means you pay lower home loan rates. But this doesn’t happen; why? Banks calculate MCLR based on the cost of raising new funds. (This includes cost of maintaining CRR, SLR and also bank operating costs).

If banks have to pass on the lower rates to customers, they have to reduce cost of funds. This depends on deposit rates offered by banks to customers, provisioning for NPAs, return on capital and so on.

Now, banks have claimed that cost of funds is high, because of high deposit rates. To be fair; SBI has cut deposit rates by 50-75 bps for short tenure deposits and 20 bps for long tenure deposits. Deposit rates are coming down. Expect lower FD rates.

But, banks cannot keep reducing FD rates. The small saving scheme rates continue to be high. These rates depend on the 10 year government bond yield and are revised each quarter. But, the 10 year yield has been reducing sharply in recent weeks. So, small saving scheme rates (This is NSC, PPF, Post Office scheme rates) could fall in the October-December quarter.

So, there is a limit to which banks can cut home loan rates even if RBI cuts the repo rate.

Home Loans: New Borrowers vs Existing Borrowers:

While banks have enticed new borrowers with lower home loan rates, existing borrowers continue to bear higher home loan rates. Existing borrowers have no option, but to go for home loan balance transfer if they want lower home loan rates.

You (an existing borrower) can see lower home loan rates if banks cut MCLR. However, for existing borrowers, the reset date determines when your home loan EMIs fall. If your home loan MCLR is linked to 6-month MCLR; your home loan rates are reset only on completion of 6 months.

What is SBI Repo-Linked Lending Rates?

From July 1st, SBI has offered home loan rates pegged to the repo rate. This is good news as you can avail SBI repo-linked home loan rates. However, these loans are offered at longer tenure vis-a-vis normal home loans.

Let’s have an example. The home loan rates for a 75 Lakh loan are 8.4% under SBI repo-linked home loan. It’s 8.55% for a normal home loan of Rs 75 Lakhs. However, the tenure under SBI repo-linked home loan rates goes up to 35 years vs 30 years on normal home loan rates.

So, how does this work?

From May 1st, savings bank accounts with balances of over Rs 1 Lakh earn interest of repo rate minus 2.75% with SBI. The bank charges floor rates on overdrafts and cash credits of over Rs 1 Lakh at 2.25% over repo rates. These are called repo-linked deposit and lending rates.

Now, SBI used to offer Rs 75 Lakh home loans to customers at 8.55%. With SBI repo-linked home loans, you get home loans at 2.25% above repo rate of 5.75%. The bank charges a 40 basis point spread over and above the rate. The home loan rate falls to 8.4%. (This is 2.25% + 5.75% + 0.4%)

What’s great is even existing borrowers can enjoy lower home loan rates by paying a 0.25% charge.

This is repo rate + 2.25% + spread (SBI is free to fix the spread for individual borrowers).

Now, Syndicate Bank, Union Bank, Indian Bank, Allahabad Bank and Bank of India are offering repo-linked rates. This will definitely help in better loan rate transmission. As banks shift from base rate to MCLR to repo-linked loans, expect lower home loan rates.

7 Factors on Which Sbi Home Loan Rate Depends:

  • SBI MCLR
  • Mark-up on the loan
  • Amount of loan you wish to avail
  • Salaried or non-salaried
  • Gender
  • Risk group which is determined by SBI
  • LTV ratio

See Also: Repo Rate Cut: Home Loan Rates to Fall?

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