Money & Banking

Festival cheer: Home, auto loans get cheaper

Mumbai | Updated on October 01, 2019 Published on October 01, 2019

If you are planning to buy a new home or vehicle this festival season, your EMIs could be lower, thanks to the external benchmark-linked interest rates that banks have begun to roll out for retail borrowers and micro and small enterprises.

The move follows the Reserve Bank of India directive that banks should introduce external benchmark-linked loans for floating rate loans to retail, personal, and micro, small and medium enterprises (MSME) borrowers from October 1.

Interest can be linked either to the RBI policy repo rate, three-month or six-month treasury bill yield, or any other benchmark market interest rate published by the Financial Benchmarks India Private Ltd.

Most banks have chosen to link their rates to the repo rate, which is currently at 5.4 per cent. With the RBI expected to cut the rates by another 25 basis points, interest rates could further reduce.

State Bank of India was the first lender to announce that it will adopt repo rate as the external benchmark for all floating rate loans for MSME, home and retail loans from October 1.

The bank will charge 265 basis points spread above the current repo rate of 5.4 per cent, meaning an effective benchmark rate of 8.05 per cent.

According to its website, home loans up to ₹30 lakh will have an effective rate of 8.20 per cent for salaried employees, while loans between ₹30 lakh and ₹75 lakh will have an effective rate of 8.45 per cent, and loans above ₹75 lakh a rate of 8.55 per cent.

In contrast, SBI’s MCLR-linked home loan had an interest rate between 8.3 per cent for (up to ₹30 lakh) to 8.65 per cent (above ₹1 crore). Other lenders such as Bank of Baroda, IDBI Bank, Canara Bank, Corporation Bank, and Indian Overseas Bank (IOB) have also introduced such loans.

“Under this new bench mark, housing loans will be available at cheaper interest rates.

“In addition to housing loans, other retail loans such as vehicle, education and clean loans, as well as MSEs, will also be available at cheaper interest rates,” IOB said in a statement, adding that the new benchmark repo-linked lending rate is fixed at repo rate +2.85 per cent (8.25 per cent at present).

Private lenders

Private sector lenders are also likely to announce the fresh rates soon. On Tuesday, Fincare Small Finance Bank announced a 25 basis point cut in its interest rate for micro loans. Experts point out that the repo-rate or other external benchmark-linked loans will have faster transmission of changes than MCLR based loans.

Existing borrowers

Existing borrowers can either continue with their existing rate setting regime till the repayment or renewal of their loans. Alternatively, they can switch to the external benchmark-linked rates without incurring any charges or fees, except some administrative and legal costs.

“These external benchmark linked loans will also ensure higher transparency and more certainty for the borrowers in anticipating the interest rates on their loans.

“However, on the flip side, the same swiftness in transmission of broader market or policy rate changes can also work against the borrowers during rising interest rate regime, as their interest rates will increase faster in comparison to the MCLR-based loans,” noted Ratan Chaudhary, Head of Home Loans, PaisaBazaar.com.

He also pointed out that before switching to external benchmark-linked loans, existing borrowers should remember that the volatility of these loans’ rates would be much higher than MCLR-based ones.

“MCLR based loans are reset at least once in a year, but those linked to external benchmarks have to be reset at least once in three months,” he said.

“The new external benchmark linked system could prove beneficial to existing borrowers who are on a floating rate loan. But such loans are only available for mortgages and home loans.

“Others, who have two-wheeler or personal loans, may not see much benefit,” said Anuj Kacker, co-founder and COO, MoneyTap.

Published on October 01, 2019
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