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Small rate cuts do not help you save much

At least 13 banks have reduced interest rates by 25 bps, three have cut by 30 bps and one by 5 bps.
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First Published: Wed, Feb 13 2013. 07 30 PM IST
Abhijit Bhatlekar/Mint
Abhijit Bhatlekar/Mint
So far over 23 banks have cut their lending rates after the Reserve Bank of India announced 25 basis points (bps) cut each in its repo rate and cash reserve ratio (CRR) in the latest monetary policy review on 29 January. Repo rate is the rate at which RBI lends money to the bank and CRR is the proportion of deposits that banks have to hold in the form of cash. One basis point is one-hundredth of a percentage point.
At least 13 banks have so far reduced interest rate by 25 bps, the latest being Syndicate Bank Ltd. Only three banks—Allahabad Bank, UCO Bank and Andhra Bank—have slashed base rate by 30 bps. State Bank of India, the country’s largest lender, however, has cut its base rate by 5 bps only.
But how much of a difference would this make to equated monthly instalment (EMI) or the total interest payout for the entire tenor? Numbers show that it doesn’t make a huge difference if the loan amount is less. For higher loan amounts, the saving is a little higher.
Says Vishal Dhawan, a Mumbai-based financial planner, “The current change in the base rate only has a marginal impact on your entire loan amount if you are an existing borrower or plan to borrow.”
5 basis points cut
After the revision, the SBI interest rate on home loans stands at 9.95% compared with 10% earlier. Calculate your saving on the EMI for a loan amount of Rs.30 lakh for a period of 20 years, and you would be saving just Rs.100 per month. Over the entire tenor of 20 years, the saving will come to Rs.23,832.
On a loan of Rs.50 lakh for the same tenor, you will save only Rs.166.20 per month considering that the interest rate was cut to 10.10% from 10.15% due to the base rate cut for loans above Rs.30 lakh. The total saving over the tenor would be Rs.39,889.
25 basis points cut
Here let us consider interest rate change of Punjab National Bank, the second largest government-owned bank in the country. A 25 bps cut means a saving of Rs.502 per month for a Rs.30 lakh loan over 20 years. Over the entire tenor, the saving would be Rs.1,20,493. Punjab National Bank’s interest rate on home loan is 10.25% compared with 10.50% earlier.
If you consider the same bank for a loan amount of Rs.75 lakh for a 20-year tenor, you would save Rs.1,263 per month and Rs.3,03,257 over the entire tenor.
30 basis points cut
A 30 bps cut will reduce your EMI by Rs.602 per month considering that the earlier interest rate on home loan was at 10.50% and now it has been reduced to 10.20% on a loan amount of Rs.30 lakh over 20 years. Here the amount you save over the entire tenor is Rs.1,44,490. All three banks that have gone for a 30 bps cut are offering the same interest rate.
However, if you have taken a loan of say Rs.75 lakh, considering that UCO Bank is giving a loan at 10.45% compared with 10.75% earlier, you will save Rs.1,515 per month and Rs.3,63,667.27 over the tenor.
What should you do?
Existing borrowers should calculate how much of a difference will the base rut cut mean for their interest payout. If it’s not much in the long term, they can consider other options. Says Adhil Shetty, CEO, Bankbazaar.com, “As you have the option to switch your loan to another borrower, you should keep an eye on the change in the base rate of other banks, too. In case your bank’s base rate cut makes only a marginal difference, you can consider switching to other banks with lower interest rate and also consider the processing charge and other fees.”
If you are a new borrower, loans in the market are now cheaper than last month.
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First Published: Wed, Feb 13 2013. 07 30 PM IST
More Topics: Banking | interest rates | loans | EMI |