Benefits of the RBI rate cut
RBI Governor Raghuram Rajan’s recent move to cut interest rates by 50 basis points was a boon in disguise for prospective home buyers. Following the move, almost all the banking institutions across the country have also introduced interest rate cuts on their loan offerings.
But there’s a catch! The older borrowers i.e., existing borrowers will get the full benefit of the rate cuts while new applicants will only get a marginal benefit of the move.
When the RBI unveiled its latest policy revision, major banks like SBI and ICICI also introduced revised rates and a new strategy to make it work for them. And if the move adopted by these two major banks manages to set the precedent, new home loan applicants will most likely be disappointed. What is this move? Find out.
Existing Borrowers are the Winners
As soon as the RBI introduced its latest policy review, SBI too slashed its base rate by 40 bps. But only the existing borrowers are expected to get the full benefit of the cut since the lending rate cut has been only 20 bps for new borrowers.
Interest Rate Spread Across Different Banks
Many banks, apart from the two mentioned, have cut their base rate, which is the lowest rate at which a bank can offer a loan, by about 30-35 bps. This is expected to have a major bearing on all their floating interest rate loans, home loans included.
The revision automatically brings down the interests for all the existing customers of the banks too. Here’s a simple example to give you a better idea of the situation. Before SBI decided to bring down the rates, they offered home loans at base rate (which was 9.7 percent) plus 5 basis points. This brought the effective interest rate to 9.75 percent.
Now let’s assume the latest rules followed by SBI (this brings the rate to 9.35%) and determine the EMIs on a loan worth Rs.30 lakh taken for 15 years. The EMI would be Rs.31,055 and a loanee would save Rs.1,30,518 on interests over the tenure of the loan.
On the other hand, ICICI bank has reduced the rate by 35 points to 9.35 percent and is offering a home loan with a spread of 20 bps over its base rate. Going by this, the current interest rate for existing customers reduced from 9.9% to 9.55%, and they save Rs.1,14,759 on interest payment.
New Borrowers are too Late
While the reduction in the rates is proving beneficial for existing customers, new borrowers aren’t as thrilled with the rates as they will have to be shelling out considerably higher amounts on paying interest. For instance, SBI increased their base rate by 25 points for their new customers.
This means that new borrowers will be paying 9.55% interest on their home loans. In other words, they are paying Rs.725 more every month than existing customers.
With ICICI home loans, new customers would be paying Rs.637 more than pre-existing borrowers for a loan amount of Rs.30 lakh.
To say the least, a few banks have already found a way to make the best out of the interest cuts, with more set to join the bandwagon over the coming months.