New home loan borrowers are gung-ho about the latest round of repo rate cuts by the Reserve Bank of India (RBI) since this will naturally equate to lower rates of interest on their loans. The big question here is that will they benefit immediately from this latest round of repo rate cuts? That is for industry experts and the market to answer.
New home loan borrowers, as per many experts, should gain instantly from the latest reduction in the repo rate by the Reserve Bank of India (RBI) although existing home loan borrowers will only receive these advantages of rates linked to the repo rate when they have paid up administrative and legal charges. These have been waived off by a few banking institutions while others will be charging up to Rs. 10,000 for the same.
What will be the impact of the latest rate cut?
As per reports, interest rates for home loans are expected to reduce by a whopping 25 basis points in case of new home loan customers. The benefits can even be higher for those customers who have not yet shifted from the MCLR (marginal cost of funds based lending rate) linked home loans to repo rate linked loans. There are many customers who are making this transition at present. Existing borrowers under the MCLR system of the bank will naturally seek greater benefits by shifting to repo rate linked home loans.
However, the administrative and legal charges are something to be taken into account for getting these benefits. This usually varies between zero to ½% of the amount outstanding across most banks. However, the upper limit for this is Rs. 10,000 as mentioned earlier. Prashant Kumar, the Deputy Managing Director at SBI, has stated that the Reserve Bank of India (RBI) has restricted banks from imposing any fees/charges for migration of customers to the new system. However, banks can impose administrative and legal charges. SBI (State Bank of India) is expected to impose a charge of Rs. 5,000 as a flat fee for those borrowers who are choosing to convert their home loans under the new system.
ICICI Bank will be waiving this charge at the moment. The Head of Mortgage and Retail Asset at Bank of Baroda, Virendra Sethi, has confirmed reportedly that Bank of Baroda (BoB) will be charging a nominal fee of Rs. 2,500 for this purpose. Yet, borrowers can only shift to the new repo rate linked home loan system and it will never be the other way round since the MCLR system will not exist at all for future borrowers/new borrowers.
How borrowers stand to benefit instantly
New borrowers will immediately benefit from lower rates of interest across banks for their home loans. Additionally, the linkage of the interest rate on home loans to an external benchmark like the RBI’s repo rate will bring in more transparency for the entire loan pricing process across the banking sector.
Previously, even if there was a cut in the repo rates, the majority of the benefits would never be passed onto customers by their banks. However, with interest rates now tied to the repo rate, any fall in the latter will lead to an instant reduction in the former. Banks will now be imposing a spread over and above the repo rate as the final rate of interest on the home loan.
Additionally, risk premium will be levied by banks depending on the overall level of risks associated with individual borrowers. SBI will be levying 2.65% as the spread over the repo rate for all its home loan customers and risk premium will vary between 15-50 basis points as per its official statement.