Recently, State Bank of India (SBI) cut its one-year marginal cost of fund-based lending rate (MCLR) by 5 basis points (bps) to 8.40%. One basis point is one-hundredth of a percentage point. This month, banks including ICICI Bank Ltd, Bank of Baroda and Oriental Bank of Commerce, have cut their MCLR by 5-10 bps. The move comes after the Reserve Bank of India (RBI) cut policy rate for the third time in June. Here is what it means for you:
HOME LOAN RATES WILL NOT FALL IMMEDIATELY
If you are an existing home loan borrower, a cut of 5-10 bps on MCLR will not bring down your home loan interest rate immediately. If you have a floating rate home loan and your loan is linked your MCLR, you will have a reset clause linked to the tenure of the MCLR. For instance, if your loan is linked to one-year MCLR, you will have a one-year reset clause. Now, if the reset clause is in May and the MCLR cut happened in July, your home loan will not change till next May. If your loan has a reset clause of July or August, you will see a fall in your home loan rate. Also, your equated monthly instalment (EMI) will not go down as banks usually adjust the tenure of the loan instead of the EMI.
SOME RELIEF FOR NEW BORROWERS
If you are about to take a floating rate home loan, you are set to get relief. Banks have cut interest rate marginally. Considering that it is a falling interest rate environment, you will get a better interest rate than the last couple of months. However, it is difficult to predict whether you should wait and watch for another rate cut before taking a loan. New borrowers should instead compare home loan rates across financial institutions before taking a loan. Usually, home loans come with a spread on MCLR. Try opting for loans that are on MCLR without spread.
OPT FOR ALTERNATIVE FLOATING RATE OPTION
You now also have the option to go for loans linked to repo rate or other external benchmark rates instead of MCLR for floating rate loans. For instance, SBI this month launched a floating rate linked to the repo rate. The rate has a margin and a spread making it 10bps cheaper than MCLR. In these loans, your interest rate will fluctuate in case of any change in repo rate. In the case of MCLR, the impact of change in repo rate comes with a lag considering the banks also have to evaluate their cost of funds.
AVOID FIXED RATE HOME LOANS
In the current interest rate environment, you should avoid opting for fixed-rate loans. Fixed rate home loans are usually fixed for a certain duration of the loan. Considering that the interest rate is falling, it is possible that you may get locked into a higher interest rate for your home loan and getting out of it will be expensive since you have to pay a higher penalty to switch loans from fixed to floating.