Decoding SBI’s home loan rate cuts

Home loans are set to become cheaper for a set of borrowers, thanks to SBI’s recent cut in rates across various categories. The bank has categorised loans up to ₹30 lakh — mainly for the affordable segment — into a new category.

Borrowers under this category will be charged 25 basis points less than earlier on their home loans — 8.35 per cent for women borrowers and 8.4 per cent for others.

For loans above ₹30 lakh and up to ₹75 lakh, the bank has trimmed rates by 10 basis points to 8.55 per cent (8.5 per cent for women borrowers). For loans above ₹75 lakh, rates remain unchanged and the bank continues to charge 8.7 per cent (8.65 per cent for women).

With these tweaks, the bank is offering one of the best deals in the market, at least in the affordable and mid-income segment. But there is more to these cuts than meets the eye.

The marginal cost of funds-based lending rate (MCLR), that the central bank introduced in April last year, has created a wide divergence in rates for SBI borrowers.

The recent changes are, no doubt, good news to new borrowers — that is, those taking home loans from May 9 onwards. For those in the affordable housing segment, the EMI is straightaway less by about ₹440 for a ₹30-lakh loan over a 15-year period. The 25-basis-point reduction can be a huge draw for those looking to buy homes in this segment.

For others, for loans up to ₹75 lakh, the 10-basis-point reduction would mean EMIs that are around ₹350 lower for a ₹60-lakh loan over a 15-year period. That’s about ₹63,000 in interest savings over the entire tenure of the loan.

Interest rates for old borrowers, on the other hand, move based on their respective contracts. In case of floating rates that are pegged against a benchmark, rates move depending on the direction and quantum of movement in the benchmark rate. Thanks to the RBI introducing the MCLR structure last year, there are two benchmark rates to reckon — MCLR and the erstwhile base rate. Let us consider MCLR first.

Borrowers who took loans after April 2016, have their home loan rates pegged against SBI’s one-year MCLR. But unlike under the base rate system, where a revision in base rate was immediately reflected in lending rates of all loans benchmarked against it, under MCLR based pricing, lending rates are reset only at specific intervals, corresponding to the tenure of the MCLR. In the case of SBI’s home loans, for instance, as the loans are benchmarked against the one-year MCLR, lending rates will only be reset every year.

SBI has lowered its one-year MCLR by 120 basis points between April 2016 and now. Hence, there are a whole set of borrowers who are charged varied rates, depending on when they took the loan over the past year.

In April 2016, one-year MCLR stood at 9.2 per cent. The effective loan rate then worked out to 9.45 per cent. Borrowers who took loans then would have continued to pay higher EMIs through last year, despite the MCLR trending down.

But these borrowers have gained substantially since April this year, as their loans have been reset to the existing MCLR. With one-year MCLR at 8 per cent, the effective loan rate (remember the spread will remain the same at 25 basis points) works out to 8.25 per cent from April this year.

While borrowers under MCLR have had a lot to cheer about, old borrowers under base rate have not found much respite. While SBI has been wielding the scissors on the MCLR, it has only tinkered with base rate. Having been held at 9.3 per cent from October 2015, the base rate is down by just 20 basis points, to 9.1 per cent, now.

These borrowers still pay 9.35 per cent interest (spread of 25 basis points). Banks do, however, allow borrowers to switch into the new MCLR regime. But do take note of the switching options that each bank offers before deciding to move.

Remember, though, that with the RBI’s rate cut on hold and interest rates likely to move up over the medium term, shifting to MCLR — where the pace of increase or decrease in rates is higher — can pinch you when rates inch up. Hence, it may not make sense for you to switch if you are towards the end of your loan tenure.