The State Bank of India (SBI) has reduced its marginal cost of funds-based lending rate (MCLR) by 10 basis points (bps). One bps is one-hundredth of a percentage point. The MCLR of the country's largest bank is now at 7.9%. The revision makes some of the old home loans linked to MCLR cheaper or on a par with what SBI is offering to its new customers.

From October this year, all new retail loans are linked to an external benchmark; SBI uses repo rate as its external benchmark. Under the new external benchmark regime, SBI offers home loans up to 30 lakh at an interest rate of 8.2%, loans between 30 lakh and 75 lakh at 8.45%, and those above 75 lakh at 8.55%.

Earlier in calendar year 2019, SBI's home loans were 10-60 bps above MCLR for different loan amounts, according to data on SBI's website. The interest rates on home loans for some of those who borrowed early in 2019 would be on a par or lower than the existing rates of the bank under the new benchmark. For such borrowers, who took a loan of up to 30 lakh, the interest rates would be between 8.0% and 8.12% after the reset clause kicks in; those with a loan of 30 lakh-70 lakh would see interest rates resetting to 8.3-8.4%; and those with loans above 75 lakh would see the reset at 8.4-8.5%.

This is in contrast to the trend in the banking industry, where new borrowers typically get better rates. "It is possible that some existing borrowers of banks would have interest rates lower than those offered to new customers. But there is a significant proportion of borrowers who take a home loan from home finance companies. Their rates would still be higher," said Aditya Mishra, founder and CEO, Switchme.in, a platform that helps borrowers shift their home loans to other financial institutions.

According to Mishra, about 20% of the visitors to his website have loans that charge less than 9%. A bulk of the remaining customers pays an interest rate between 9% and 10%. If you are among those borrowers who are servicing loans above the interest rates offered by banks, it's time you think of switching the loan.

Banking industry experts said it makes sense to switch if your existing tenure if over 10 years. This is because in the initial years of the loan, a large part of the equated monthly instalment comprises the interest.

As a rule of thumb, a borrower should look at shifting the home loan if the remaining tenure is above 15 years and she's getting a loan cheaper by 25 basis points than what her existing lender is offering. For those who have a remaining tenure between 10 years and 15 years should look at switching only if the interest rate difference is above 50 basis points. If an individual has less than 10 years remaining for the loan, then the borrower needs to estimate if there will be any savings on switching.

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