Blog

Major Implications Of 50 BPS RBI Rate Cut On Your Home Loan

In the fourth bi-monthly Monetary Policy Statement for 2015-16, The Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75 percent, while keeping CRR and SLR unchanged at 4 percent and 21.5 percent, respectively.

 

 

My name is Raghuram Rajan and I do what I do!

Within couple of hours of rate cut by the Reserve Bank, country's largest lender SBI slashed its lending rate by 40bps, while the largest private sector lender ICICI Bank hinted at cutting its base rate by at least 25bps. The new rates will come into effect from October 5. This will now make home loans cheaper. But what will be the impact on the monthly EMIs and loan tenure?

Let’s begin by taking the example of Mr. Sharat (30 years old), who works as mid-level manager for a reputed e-commerce firm in Delhi. He earns a gross salary of 30 lakhs. He lives with his family in a 1200 sq. ft. 2 BHK flat for rent in Saket, and shells out Rs 25,000 per month. The stagnant/falling property prices and attractive home loan rates have spurred a new interest in him to explore best properties in Delhi consider buying a home, which was a dream several years ago. 

Sharat and his wife after thorough research, have finalized their dream home and are now evaluating financing options to be able to buy the house. He has planned to buy a property worth Rs 1 crore. But he will have to pay a down payment of 25 lac (as per RBI guidelines) out of his pocket and go for a bank loan for the remaining 75 lac. Since his monthly salary is Rs 2 lakh, he can have a maximum EMI of Rs 82,441 approved by the bank (minimum ~40% Debt/Income ratio as per RBI guidelines) at 10.4% interest rate .

Earlier he had this dilemma – “Should I Go For 15 Years or 30 Years Tenure of My Home Loan?” Recently he got his loan disbursed for a 30 year tenure. But now with the new interest rate and no change in EMIs (banks usually don’t change EMIs), he has to find the impact on loan tenure!

Mr. Bharat (30 years old), is his twin brother and wants to buy a similar dream home. But he hasn’t applied for his home loan yet. In this case, what will be the impact on both the EMIs and loan tenure?

Before rate cut: @10.4% interest

 

After rate cut: @10.0% interest (assuming 40bps reduction)

Scenario 1: Sharat’s existing loan

360 months tenure now reduces to 302 months (assuming all other factors remain constant).

 

Scenario 2: Bharat’s new loan

For a 30 year tenure, the EMI reduces by Rs 2,227 per month and the total loan amount reduces by Rs. 8,01,895 compared to the earlier rates.

 

Conclusion

Like in the case of Sharat, if you have already taken your home loan on floating rates, then check with your bank on the changes in home loan tenure. Also explore if there is a possibility to reduce the EMIs.

Like in the case of Bharat, if you are planning to take a home loan, then this is the right time as the repo rates are at a four and a half year low and is not expected to increase soon. This will prompt potential home buyers to take immediate buying decisions and will result in increase in price for properties due to the sudden surge in demand. Also there will be lower returns from bank savings, hence must be invested in other long term investments like property which offer higher returns.

Assumptions

  • Fluctuations in the rate of interest for the entire period of tenure are not considered while describing all the possible scenarios as changes in the rate of interest will change the inferences every time whenever there is a change in the rate which will further confuse the audience and makes it difficult to choose an option.
  • Pre-payment scenarios cause fluctuations in the EMI to be paid for the tenure you have taken. We have not considered prepayment to avoid any confusion in the calculations of the EMI.
  • Different tenure scenarios haven't been explained.

Fundamentals on Home Loans by Mr. Syed Haseeb – Founder, FinWizz

Loading Comments...

Connect with Us

Subscribe to Blog

  • Get latest real estate updates delivered to your inbox.