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Will you benefit from the home loan rate cuts?

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SBI has reduced home loan rates to 6.7% for loans up to 75 lakh, while Kotak Mahindra Bank‘s offer starts at 6.65%. SBI has a further 5 basis points concession for women borrowers. HDFC has reduced its retail prime lending rate by 5 basis points from 4 March. Mint decodes.

How will borrowers gain from the rate cut?

A cut in interest rate brings down the cost of borrowing. For instance, if a person has availed a home loan of 50 lakh at 7% for 15 years, the EMI will be 44,941, with an interest outgo of 30.89 lakh over the loan tenure. If the interest rate is reduced to 6.75%, the EMI will be 44,245, while the interest component, or the cost of the loan, will be down to 29.64 lakh. The borrower can also opt for reducing the tenure in case of a rate cut, and keep paying the same EMI to close the loan account early. Keeping the EMI same and reducing tenure will lead to higher savings compared to reducing EMIs in case of rate cut.

Who stands to benefit from the low rates?

The rates have been cut for new borrowers, and is not applicable to existing borrowers. Existing borrowers can only benefit in case the RBI cuts the repo rate, as the central bank has mandated banks to link their home loan rates to external benchmarks since 1 October 2019, and most banks have opted for repo rates as the external benchmark. Repo rate-linked home loan is calculated on the repo rate, plus the spread or margin of the bank. So, home loan rates will move automatically with a change in repo rates as the margin remains fixed, unless a borrower’s credit assessment undergoes a substantial change.

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Who will be eligible to avail the lowest home loan rate?

Banks have an eligibility criteria for the lowest home loan rate. For example, State Bank offers the lowest rate of 6.6% to salaried women for loan applications of up to 30 lakh on the YONO app. For salaried men, it is available at 6.65% on the YONO app, and 6.7% otherwise. A borrower’s credit score also determines home loan rates.

What are the picks for current borrowers?

If your lender is charging a higher loan rate, you can opt for a balance transfer after calculating the savings. Balance transfer is mostly advisable in case the differential in rate offered is at least 50 bps and the tenure is 10 years and above. However, before opting for a transfer one must also look at the charges, including stamp duty and processing fee, which can be as high as 1% of the outstanding loan amount. Some lenders also charge documentation, legal, valuation and technical fees. Stamp duty charges vary across states.

Should you opt for a bank or an NBFC?

Some non-banking financial companies are offering competitive rates to home loan borrowers and generally have less stringent criteria compared to banks. However, NBFCs offer home loans based on the prime lending rate (PLR) and the interest rates are not linked to any external benchmark. Therefore, the interest rate changes may not be as swift and transparent in case of an NBFC when compared to home loans offered by banks. That said, NBFCs may suit borrowers with low credit scores.

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