Home loan borrowers who have home loans tied to the MCLRs of their respective banks, may witness lower EMIs in the near future due to the onset of the reset date. Experts feel that home loan borrowers in general may witness another rate cut in terms of interest they’re paying already on their home loans due to the approaching reset date which is when their banks will transmit the lower interest rates due to them on their loans.
Post reducing the repo rate by a whopping 135 basis points for the calendar year 2019 itself, the RBI (Reserve Bank of India) has kept the policy rate unchanged in its latest meeting on monetary policy for this year. Yet, borrowers may still be able to save more money on the costs of their home loans.
How borrowers stand to gain in the future
Borrowers who have home loans tied to the MCLRs of their banks, will witness a lower home loan EMI in the foreseeable future as per experts. The MCLR of State Bank of India (SBI) was at 8.5% in the same time-frame in 2018 and with the reset date for the 1-year MCLR coming up in December 2019, the MCLR has already lowered to 8% at the bank. A similar scenario is expected to play out for borrowers at other banks as well.
EMIs for home loans will thus reduce soon for those borrowers who have reset periods for their loans coming up in the next few months. In case your bank is not cutting home loan EMIs, it may have already lowered the home loan tenor instead. The overall net impact is on the interest paid on your home loan which will be lower as a result as per experts. RBI has already stated that the 1-year MCLR (marginal cost of funds based lending rate) has come down by 49 basis points already. It has also stated that overall transmission of lower rates should improve considerably over the next few months as well.
The RBI is expecting a decline in the share of home loans linked to the base rates which have remained somewhat sticky of late. MCLR-based loans with floating rates, which usually have annual rest periods, will be up for renewal likewise, leading to lower home loan interest rates and EMIs/tenors for a large number of borrowers.
What else should you keep in mind?
Based on information released by the Reserve Bank of India (RBI), the MCLR of public sector banks stood at 8.7% for November 2018 while it has lowered to 8.35% for PSBs in November, 2019, on an average. Additionally, the RBI reports have clearly indicated a peak in MCLR rates between December-February for FY2017-18, touching a new high of 8.75% in that period. Thereafter, the RBI has lowered the repo rate by 135 basis points in 2019 and several banks now have MCLR of 8% on offer for borrowers.
Yet, transmission of lower rates has not been done comprehensively and there is still ample room for a reduction in the MCLR at most banks. Borrowers will thus benefit from lower home loan EMIs in the future, as opined by several experts. From the 1st of October, 2019, the interest rate on home loans at banks has majorly been tied to the repo rate of the RBI and hence any increase/decrease in the key policy rate will lead to an instant increase/decrease in the bank’s lending rates. Transmission of rates is expected to improve hugely and become swifter under this new system unlike the rate cuts in the MCLR or base rate frameworks.
As per RBI guidelines, the repo rate revisions have to be transmitted to home loan borrowers at least once for every quarter. Yet, there is a catch; in case the repo rate is raised by the Reserve Bank of India (RBI), then borrowers will naturally have to pay higher monthly EMIs on their home loans.