The State Bank of India (SBI), the country’s largest lender, has cut interest rate on its home loans by 5 basis points (bps). One basis point is one-hundredth of a percentage point.

The move comes a day after the Reserve Bank of India (RBI) cut the key policy rate by 25 bps from 6.50% to 6.25%.

Usually, when SBI cuts rates, other banks tend to follow the move. However, this time it will not be the same. Here is why:

SBI cuts 5 bps on home loans

In case of a floating rate home loan, there are two components linked to it – marginal cost of funds based lending rate (MCLR) and spread. MCLR is built on four components: marginal cost of funds, negative carry on account of cash reserve ratio (CRR), operating costs and tenor premium.

Banks are also allowed to determine a spread above the MCLR. The spread is usually decided based on credit risk and tenor. Usually most banks offer a spread of 5-90 bps above MCLR on home loans.

Considering that the SBI rate cut is on spread and not benchmark rate, it will not impact all borrowers. “It is a cut in spread and not on MCLR. Without reducing deposit rate, it is not possible to cut MCLR.

Our deposit rates are the lowest in the market. Hence, I don’t have scope for further rate cut in deposits. Our priority is home loans and that is why we wanted to give some relief to this segment," said Rajnish Kumar, chairman, SBI.

The cut will benefit only new borrowers who take a loan up to 30 lakh. “The change in spread will benefit new home loan borrowers because mostly home loans are linked to one year MCLR. When next reset comes, the rate will be adjusted based on the MCLR but the spread continues for life as per RBI’S instruction," said Kumar.

Besides the cut in spread by SBI, Bank of Maharashtra also cut its six month MCLR. The bank offers home loan on one-year MCLR and not on six month MCLR. Hence, no home loan borrowers will benefit from it.

Meanwhile, there are banks that have, in fact, increased rates before the repo rate cut announcement in the recent monetary policy. For instance, Bank of Baroda has increased its one year MCLR by 10 bps to 8.75% from 8.65%. The bank gives home loan on one-year MCLR. It has also increased the rate on MCLR of other tenure by 20 bps. The bank offers loans to a good credit customer without a mark-up on its MCLR.

All banks have around seven tenor of MCLR. For instance, SBI has an MCLR tenor of overnight, one month, two month, three month, six month, one year, two year and three year. Most banks link floating rate home loans to six-month or one-year MCLR.

What it means for home loan borrowers?

Although the RBI cut interest rate in its recent monetary policy announcement, indicating a rate reversal of lower interest rate cycle, you are unlikely to see any immediate impact on your home loans in the near term.

Considering that a component of the MCLR is linked to deposit rates, unless your fixed deposit rates are cut, you will not see any substantial change.

If you are planning to take a loan, besides considering the interest rate, also factor in other charges such as processing fee, administrative cost and stamp duty.

Look closely at the spread of a home loan. If it is higher, remember that the spread will continue for the lifetime of the loan.

You need to shop around to get the best rates. You can either go to individual bank websites or loan aggregators to compare the cost.

If you are a depositor, it is unlikely that the banks will cut fixed deposit rates immediately. Hence, you can lock in to your FD rates after comparing the rates of different banks.

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