EXPLAINED: Here's how cut in MCLR will impact your home loan EMI

The State Bank of India today announced a 5 basis point cut in its Marginal Cost of Funds-Based lending rates (MCLR). So effectively, interest rates on all home loans or any other loan linked to MCLR will go down. In this article, we try to explain how MCLR cut will impact you vis-a-vis EMIs.  

Home loans and all bank loans are now linked to MCLR. Which means a rate cut in MCLR will give a boost to real estate consumer sentiments. The Reserve Bank of India kept the repo rate unchanged at 5.15 per cent in its monetary policy.

Which is a reprieve signal for home loan borrowers and other bank borrowers in the coming months. The largest commercial bank SBI today cut its lending rates making home loan and auto loan cheaper by announcing 5 basis point reduction in MCLR (Marginal cost of funds-based lending rates). 

MCLR Rates are based on banks own cost of funds. Rate cut in MCLR will now allow borrowers to pay lower EMIs on their home loans. 

Anuj Puri, Chairman – ANAROCK Property Consultants says, “This is a big move and will bring the much-needed relief to the cash-starved real estate sector - and to both developers and the HFCs from the liquidity perspective. It will help ease out the time for maintaining and managing cash flows for cash-strapped developers and help them to completing several stuck projects. That said, it will not address the other main issue prevailing in the real estate sector – that of continuing low demand.”

According to Ramesh Nair CEO & Country Head, JLL India, “The real estate sector has been in particular benefitting from rate cuts which were transmitted to some extent through mortgage rates and repo linked loans to end consumers. This was reflected in the 6% y-o-y growth in residential sales in 2019. Moreover, the recently announced extension of benefits to both developers and home buyers for affordable housing in the Union Budget is expected to maintain the growth momentum in the sector.”

How new MCLR will impact your home loan EMI: 

• MCLR is associated only with floating rate home loans. Therefore, if the home loan that you picked for comes with fixed rates of interest, in that case, the MCLR will not affect the home loan. Change in repo rate will decide whether you gain or lose with the MCLR. 
• At present, the home loan interest is following a downward drift. So, it can prove to be beneficial to switch to MCLR if you are planning to purchase a house and avail the benefits under the MCLR related home loans.
• According to Piyush Gupta, Managing Director, Capital Markets India, Colliers International-"Considering inflation above the comfortable level, RBI as expected has kept the rates unchanged and kept stance open for rate cuts in the future. The dependence for demand spur will be on rationalisation of Personal Income Taxes for demand growth. However, allowing one time one-year extension of Project Loans for Real Estate Sector will provide a significant lifeline to Developers and Financiers as it will allow Real Estate Developers to complete the project and Financiers not to classify as NPA" 
• Therefore, under MCLR, do not expect the EMIs to fall immediately after the RBI cuts repo rate. Instead, have a systematic partial prepayment plan in place to lower interest burden on the home loan
• As soon as one will prepay the home loan, he or she will have more cash and equity in hand 
• For an existing customer of home loan MCLR rate cut will not have the immediate effect on your home loan
• Your home loan will get reset depending on 6 months reset period or 1 year, but for the new home loan borrowers it will impact the loan EMIs
• Loans will get cheaper for the new home loan borrowers

A rate cut of MCLR also explains that fixed deposit rates might change as well

•  Remember, that MCLR linked home loans are applied only on those borrowers who have taken the loan after April 1 ,2016 and before October 1,2019. After the 1 year reset period it comes into effect and no decision will impact immediately. 
• MCLR linked EMIs will either come down or the tenure will become less 
• If you are looking for a new home loan them there are two things to know from the banks.
• The first is the bank’s RLLR or the external benchmark rate (EBR) and the actual spread or margin for you and the second is the effective home loan interest rates which will be important while comparing the home loan rate of interest with other banks.

The MCLR will take one year (12 months) to restructure the home loan restructuring thus will boost the real estate in future. 

So, what are you waiting for? Just grab the MCLR rate cut opportunity and avail the benefits of new home loan rates by buying a house.

“The RBI’s move today to ease rules for projects delayed for reasons beyond the control of promoters by one year will provide the much-needed elbow room for developers” says Nair.