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The interest rates on home loans for existing customers and those wanting to take a new loan are going to fall as Reserve Bank of India has cut policy rates and taken measures to infused liquidity into the banking system. Fixed deposit rates are also likely to see a downward revision.

For borrowers, whose loans are on the earlier benchmark -- marginal cost of fund-based lending rate (MCLR); it would make sense to evaluate and shift to the new regime where interest rates are linked to an external benchmark, once banks start lowering rates. “Many borrowers on old regime could benefit if they shift to repo-linked rates now," said Virendra Kumar Sethi, head, mortgages and other retail assets, Bank of Baroda.

The central bank has reduced the repo rate by 75 basis points (bps) to 4.4%. The existing repo rate was 5.15%. RBI has also reduced reverse repo and cash reserve ratio (CRR) and taken other measures to ensure liquidity into the system, including targeted long-term repo operations (TLTRO). One bps is one-hundredth of a percentage point.

Bankers and economist said that new home loan rates can come down by 75 bps. If a bank was offering the lowest home loan at 8%, expect it to revised it to 7.25%. Effective 1 October 2019, banks have to link all new retail loans to an external benchmark, which is the repo rate for most banks.

However, if you are an existing customer who took a floating loan after 1 October, your loan is bound to fall by 75 bps according to the regulations. RBI has made it mandatory for banks to reset home loan interest rate under the external benchmark regime at least once in three months.

According to bankers, many existing customers are still on the earlier MCLR regime. There is not straight answer to whether their rates will come down and to what extent. During the MCLR regime, banks gave home loans that had a different reset period. Some gave loans with a three-month reset clause, which meant interest rate will be revised every quarter. But a majority of lenders opted for an annual reset clause. Whether interest rate on MCLR-linked loans would fall depend on the reset date and also on how the cost of funds reduce for each bank following RBI’s policy measures.

For those on MCLR, there is an option is to switch to the new regime as banks are expected to lower rates for new loans in the next few days. “Once the lockdown is over, and banks have reduced interest rates, home loan borrowers can use an online calculator to see how much will they save if they shift their loan from old regime (MCLR) to the new one (repo rate-linked)," said Adhil Shetty, CEO, Bankbazaar.com, an online marketplace for financial products.

When deciding to shift, a borrower should not try and predict how rates would behave in the future. “Take a decision based on your circumstances and equated monthly instalment. No one can predict how much benefit will someone get in the future by sticking to MCLR-linked loan. If you are saving on your monthly outgo, it would make sense to shift," said Shetty. To shift to the new regime, most banks ask customers to give a written application at the branch. It cannot be done online.

After the RBI policy, economists expect the deposit rates to fall, too. “If banks lower their benchmark rates, deposit rates would also come down. They are interlinked," said Madan Sabnavis, chief economist, CARE Ratings.

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