A cut of 5-10 bps will not take down home loan interest rate instantly for the existing home loan borrower.
Mumbai: The Reserve Bank of India (RBI) had cut the repo rate by 0.25 bps for the third time in June, which also lends all Public sector banks to cut their MCLR.
Currently, Banks like Bank of Baroda (BoB), ICICI Bank, and Oriental Bank of Commerce, have cut their marginal cost of fund-based lending rate (MCLR) by 5-10 bps, while State Bank of India (SBI) cuts its one year MCLR by 5 bps points to 8.40 per cent.
Home loan rates will not fall immediately
A cut of 5-10 bps will not take down home loan interest rate instantly for the existing home loan borrower. If your home loan is on a floating rate and your loan is linked with the MCLR, you will have a reset clause linked to the tenure of the MCLR.
In case, if your home loan is linked to one-year MCLR, you will have a one-year reset clause. For example, if the reset clause is in May and the MCLR cut happened in July, your home loan will not change till next May. If your home loan has a reset clause of July or August, you will see a fall in your home loan rate. Also, your EMI will not go down as banks usually adjust the tenure of the loan instead of the EMI.
Some relief for new borrowers
New borrowers should compare home loan rates over financial institutions before taking a loan. As a rule, home loans come with a spread on MCLR. Try selecting for loans that are on MCLR without spread.
In case, you are going to take a floating rate home loan, you are set to get relief. Banks have cut interest rate marginally. Considering that it may be a falling interest rate environment, you will get a better interest rate than the last couple of months.
In any case, it is difficult to predict whether you should hold up and watch for another rate cut before taking a loan.
Opt for alternative floating rate option
You now also have the option to go for loans linked to repo rate or other external benchmark rates instead of MCLR for floating rate loans. For instance, SBI this month launched a floating rate linked to the repo rate. The rate has a margin and a spread making it 10bps cheaper than MCLR. In these loans, your interest rate will fluctuate in case of any change in repo rate. In the case of MCLR, the impact of change in repo rate comes with a lag considering the banks also have to evaluate their cost of funds.
Avoid fixed rate home loan.
In the current interest rate circumstances, you should avoid going for fixed-rate loans. Fixed rate home loans are usually fixed for certain period of time of the loan. Considering that the interest rate is falling, it is conceivable that you may get bolted into a higher interest rate home loan and getting out of it will be expensive for you since you have to pay a higher penalty to switch loans from fixed to floating.