Do you have a home loan or plan to shop for one soon? Then you’re probably being swept off your feet by the spate of rate cuts announced by banks recently. While the rate cuts are indeed good news for older borrowers who will see their EMIs fall, new borrowers may have to temper their expectations, especially if SBI and ICICI Bank actions become the norm.
Shortly after the policy review, SBI slashed its base rate (the minimum rate at which it lends) by a handsome 40 basis points. But the full benefit of this will get passed on only to its existing borrowers. For the new borrowers, SBI has lowered its lending rates by just 20 basis points. So, if you have been putting off your home loan in the past year in anticipation of the RBI’s rate cuts, you may have already missed out on some of the best deals.
The spread game Let’s get some background first. The RBI’s steep 50 basis points rate cut last week prompted most banks, which were waiting on the sidelines, to act immediately to reduce their base rates. Many banks have reduced their base rates by 30-35 basis points in the past week. This will impact the interest rates on all their floating rate loans, including floating rate home loans.
A revision in the base rate automatically lowers the rates by the same extent for all the existing borrowers from a bank. Let us understand this with the help of an example. Before reducing its base rate, SBI offered home loans at base rate (9.7 per cent) plus 5 basis points. Banks usually charge interest on different loans as a mark-up on their respective base rates, which is called the spread. Hence, SBI’s effective home loan rate worked out to 9.75 per cent.
With the 40 basis point reduction in SBI’s base rate, the interest rate is automatically revised down to 9.35 per cent for old borrowers. Now, let’s assume that you had a ₹60 lakh outstanding home loan with 15 years left, at 9.75 per cent. Your EMI in this case works out to ₹63,562.
Now, at 9.35 per cent, your EMI will be ₹62,112. You thus save about ₹1,450 and ₹261,000 over the entire term of the loan. Significant savings, over the tenure of the loan, wouldn’t you say?
ICICI Bank has also lowered its base rate by 35 basis points to 9.35 per cent. The bank offered home loans at a spread of 20 basis points over its base rate. Hence, the lending rate for existing borrowers has come down from 9.9 per cent to 9.55 per cent. Your EMI thus reduces by ₹1,275.
Almost all banks have reduced their base rates in the past week. Many of them were offering home loans at base rates. To name a few, Bank of India, Canara Bank, UCO Bank, Andhra Bank, PNB and Indian Bank have lowered their base rates by 25-40 basis points.
Similarly, following a 25-basis-point reduction in its retail prime lending rate, HDFC has lowered its home loan rates from 9.9 per cent to 9.65 per cent. This works out to a savings of ₹912 on the EMI and about ₹164,000 over the entire term of the loan.
Sorry, you’re late While older borrowers gain when banks slash their base rates, it is not so cut and dried for new borrowers, who approach banks for loans. This is because with new customers, banks have the option of tweaking the spread at which they offer their home loans. In the case of SBI, for instance, the bank recently increased the spread on new home loans to 25 basis points, from 5 basis points for its older customers.
Thus, even at a lower base rate of 9.3 per cent, new borrowers will be paying 9.55 per cent — 20 basis points more than an existing borrower.
In other words, they will have to pay an EMI of ₹720 more than an old borrower for a ₹60 lakh home loan for 15 years.
ICICI Bank too has pegged its spread for new borrowers at 30 basis points (from 20 basis points earlier). Hence, for a new borrower, ICICI Bank’s home loan rate is 9.65 per cent.
So, if you have been putting off your home buying, waiting for banks to lower their base rates, you may feel short-changed. If banks increase spreads, this may well offset any benefit of a base rate cut.
Even two years ago, when banks lowered their lending rates, it was their older borrowers who were often stuck with higher rates. Why has this changed?
New versus old In the last one year, as RBI has pressured them to cut rates, banks have reduced their spreads rather than their base rates. SBI, for instance, charged a mark up of 30 basis points above the base rate until December 2013. But it has since trimmed its spread to 15 basis points and then to 5 basis points. In the past year, many banks have been offering loans at wafer-thin spreads. Now, if banks decide to increase their spreads on new loans, newbies are bound to feel short-changed.