New lending rate calculation makes home loan cheaper

From April 1^st onwards, home loans are going to be cheaper. As part of the new rules announced by RBI, banks across the country will have to calculate their lending rate as per the marginal cost of funds. The country’s biggest lender State Bank of India has revised its home loan rate to 9.4%. This will see EMIs of customers falling down by Rs.300 for those availing Rs.50 lakh loan for 15 year.

Under the new formula, the banks will have to regularly calculate their cost of funds. If there is any change, the bank has to pass on the same to their borrowers by revising their existing benchmark.

Following suit, private lender ICICI Bank has also announced a one-year MCLR of 9.2% without announcing the mark-up on which they will provide the loans.  The interest rates on deposits above Rs.1 crore at ICICI Bank have been reduced by 55 basis points

As against base rate of 9.3%, HDFC Bank has also announced a one-year MCLR of 9.2%. However for HDFC Bank, since home loans are disbursed by its parents company HDFC, the cost of loans will be determined by prime lending rate (PLR).

Talking about this revised formula, Rajnish Kumar, MD, SBI says “SBI is the market leader in home loans with a portfolio of over Rs 1.9 lakh crore. This year, we have seen a year-on-year growth of 18% in home loans and we expect this growth to continue.” SBI is also revising the rates for other loans such as personal and auto making it more competitive. The existing borrowers can also switch to the new rates by paying a nominal fee.

Previously, the base rate was calculated as per average cost of funds. However, under MCLR formula, the rates will be revised every month as cost of new deposit changes. Although once a loan is availed, the rate of interest will be reset only after a year.

New borrowers will have a different situation. A person, if he avails loans on April 1^st, 2016 he will get loans at prevailing MCLR but for another borrower who takes a loan next month, the rates can be lower if the cost of fund declines. If the cost of funds changes every month, the bank will have 12 different sets of MCLR.

RBI, in its efforts to pass on the benefits of rate cuts to customers have asked all banks prepare a range of lending rates with varying maturities.