By cutting the repo rate yet again, this time by 25 bps, the RBI has increased pressure on banks to pass on the decline in interest rates to borrowers. If banks pass on the full benefit of the cut borrowers stand to gain a lot.
However, it remains to be seen how much and when they do so. Getting your loan refinanced comes at a cost. Borrowers should let the dust settle, explore banks and look to switch loan if they find that their bank is not passing on the rate cut. Getting your loan refinanced would mean new MCLR rate would apply to you and as more and more banks cut rates taking a decision will be easier .
The 0.25 per cent cut in repo rate taken together with reduction in small savings rate and the MCLR-linked lending is expected to put pressure on banks to cut lending rates.
Reserve Bank of India (RBI) in its first bi-monthly monetary policy review for 2016-17 today has cut the repo rate by 0.25 percent to 6.5 per cent. In an environment of controlled inflation, the focus was on the repo rate, the rate at which RBI lends to banks..
A cut in the repo rate means lower cost of funds for the banks. Assuming banks pass on this rate cut to the borrowers of home, car and other loans which are on floating rate, they would benefit. Over the last 18 months or so, RBI had cut repo rate by 1.50 percent, however banks have passed on only about 0.5 percent to the borrowers. It remains to be seen how much of today's rate cut will be passed on to borrowers.
Let's see how a fall in rate impacts home loan which is on flexible interest rate.
On Loan TenureAssuming the banks pass on the benefit, and home loan rate falls by 0.25 %, the cumulative advantage could be large. Let' assume, outstanding amount on a home loan is Rs 10 lakh, with 20 years remaining and at an interest rate of 10.50 percent at an EMI of Rs 9,983. If rate falls by 0.25 percent, keeping the EMI constant, the tenure falls by about 13 months.
On EMIsThe immediate and most visible impact is on the EMI's. Let's say the EMI on Rs 40-lakh loan for 15 years at 9.50 percent is Rs 41,769. If there is a 0.25 per cent decrease in home loan rate, the EMI falls to Rs 41,168, a savings of Rs 600 a month.
On Interest BurdenThe actual impact is visible in the longer term especially in terms of total interest paid. In the example above, the total interest burden on the Rs 40 lakh loan if run till 15-years comes to Rs 35, 18,418. When rate falls by 0.25%, it translates into interest savings of Rs 1, 08,000.
NEW BORROWERSThe new benchmark for lending from 1st April is the marginal cost-based lending rate (MCLR) which would replace base rate linked lending in due course of time. Few banks have announced MCLR which is lower than the base-rate linked rate. The reset mechanism of MCLR is more dynamic and most banks would either reset it half-yearly or yearly. The advantage which borrowers failed to get when repo rate was cut is something borrowers can expect from the MCLR mechanism.