Home loans and auto loans will get cheaper even if the RBI keeps the buyback rate unchanged

Borrowers paying EMI on their floating rate loans have nothing to be happy about, as the Reserve Bank of India (RBI) has kept the buyback rate constant in its October 2020 monetary policy. Borrowers can expect some relief from past RBI cuts, however, as several banks have lowered their MCLR and interest rates pegged to the repository in the recent past.

If you are a borrower with a loan tied to the borrowing rate based on the marginal cost of funds (MCLR), the drop in the MCLR will help you pay lower EMIs on your loan when the restoration period arrives. ICICI Bank, Bank of India, Central Bank of India and Union Bank of India are some of the banks that have seen a reduction in the MCLR in recent weeks. With the upcoming holiday season, banks are expected to lower the interest rate on home loans even further.

The RBI has also taken another important step. Differential risk weights are applied based on loan size and loan-to-value (LTV). The RBI has streamlined the risk weights by linking them only to LTV ratios for all new home loans sanctioned through March 31, 2022.

These loans will have a risk weight of 35% when the LTV is less than or equal to 80%, and a risk weight of 50% when the LTV is greater than 80% but less than or equal to 90%. This measure is expected to stimulate the granting of bank loans to the real estate sector.

As of October 1, 2019, loans, including home and auto loans, offered by banks are tied to an external benchmark, which for most banks is the RBI repurchase rate. Currently, home loan interest rates for new borrowers start at 6.7 percent; however, for most borrowers, depending on loan amount, profession, gender, etc., it is 7 percent or even more.

If you are looking for the best interest rate for home loans, these lenders can be explored: SBI home loans and HDFC home loans are available from 6.95%, while LIC Housing Finance, Union Bank of India and Bank of India offer home loans with interest rates starting below 7 percent.

The SBI 1-year MCLR has been lowered as follows in recent years:

July 2016: 9.15%
July 2017: 8.00%
July 2018: 8.25%
July 2019: 8.40%
July 2020 to September 2020: 7.00 percent

Currently, for new borrowers, the interest on SBI home loans is at a multi-year low. The previous low was recorded around 2004, when the interest rate on home loans was around 7 percent or even lower than that. SBI home loans are available between 6.95% and 7.35%. The actual interest rate for borrowers depends on gender, loan amount, risk profile of the borrower, profession, and length of the loan.

Currently, for SBI, the mortgage loan is available for some categories at 6.95 percent. The SBI EBR as of July 2020 is 6.65 percent and for loans below Rs 30 lakh, there is a ‘Margin’ of 35 basis points or 0.35 percent. So, effectively, the rate becomes 7 percent. However, for women borrowers, there is a concession of 5 basis points. Therefore, the effective interest rate reaches 6.95 percent for these borrowers.

The repurchase rate remains at 4%, while the reverse repurchase rate is at 3.35%. The buyback rate is the rate at which banks borrow money from the RBI. Therefore, the lower the repurchase rate, the lower the cost of funds for banks which, in turn, are in a position to pass the lower rates on to borrowers.

Let’s see how a 100 basis point or 1 percent cut in the interest rate on home loans affects your EMI and your total cost of interest.

Assuming one takes a home loan of Rs 35 lakh for 15 years, the savings in EMI and interest will be:
EMI Saved – Rs 1860 (Annually Rs 22,320)
Total interest saved – Rs 1.87 lakh

EMI restructuring plan

While RBI EMI’s six-month moratorium scheme ended on August 31, 2020, the resolution framework offered by banks is open for borrowers to restructure their loans. Borrowers who find it difficult to pay EMIs on their home, car, or personal loan can benefit from loan restructuring. SBI has already started the process, and loan restructuring can be requested by visiting the bank’s website or by approaching the bank’s branch. However, not everyone may be eligible for this resolution and restructuring of their loans. It is necessary to verify the eligibility according to the rules of the Resolution under this framework.

Read also: SBI publishes eligibility conditions for loan restructuring after EMI moratorium

To take advantage of the loan restructuring, SBI retail clients will need to log into the portal where they will be prompted to enter their account number. After completing OTP validation and entering some necessary data, the customer will get to know their eligibility. The restructuring process will be completed after the verification of the documents and the execution of simple documents in the branch / CPC.

Read also: How to Apply for SBI Loan Restructuring Online: Document Checklist, Guidelines

The fees will be rescheduled and the extension of tenure will be for a period equivalent to the moratorium granted subject to a maximum of 2 years.

Read also: SBI EMI Moratorium: Learn about the processing fee, the interest rate calculation during the extension period

This restructuring is in addition to the EMI moratorium scheme that ended on August 31, 2020. The good news is that anyone can opt for it and not necessarily those who had availed themselves of the 6-month moratorium scheme since March 2020. The Last date to request relief under the resolution framework is December 24, 2020.