The RBI’s announcement bears good news for home loan borrowers with secure incomes. The announcement stated interest rates in the category will drop by 40 basis points to 7%. The drop to 7% makes this the lowest it has been in more than 15 years.
Borrowers facing income uncertainty can now avail an additional three-month extension to streamline their finances. Borrowers who have not availed the extension yet can do now, and defer payments by 3 months, if needed.
For loans of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be approximately Rs. 2.34 lakh- equal to only 8 EMIs. Thus, burdens shall reduce due to the reduction in interest rates.
For all existing borrowers, the SBIs interest rates on home loans (up to 30 lakh INR) will reduce to 7% from the existing 7.4%. Whereas, loans between 30 lakh and 75 lakh INR, it shall be reduced to 7.25% from 7.65%. And, loans 75 lakh INR and above, it will reduce from 7.75% to 7.35%. However, for female borrowers, rates shall further decrease by 5bps.
On May 8, banks like SBI increased the spread on home loan rates for new borrowers. The increase was of 20bps, achieved by increasing the margin above the benchmark of 7.05% kept against the repo-rate. SBI reasoned that due to the pandemic, the credit risk of borrowers increased and therefore, the bank increased risk premium by 20bps.
Various banks argued that the repo-rate cut does not lower their cost of funds. Instead, it leads to lowering of lending rates for existing borrowers. Thus, banks may resort to raising spreads.
A senior banker also said that the lowering of rates matching the present round of reduction in repo rates would be circumvented by most banks.