Interest rate cut: Know how it will benefit home loan borrowers

Banks switched to MCLR as their new benchmark lending rate from June last year, replacing the base rate system for new borrowers.

Interest rate cut: Know how it will benefit home loan borrowers
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New Delhi: The Reserve Bank of India's (RBI) decision to cut its key lending rate by 0.25 percent, is likely to translate into lower interests rates for home, auto and other loans.

RBI has cut the repo rate- first time in 10 months - to about 7-year low of 6 percent.

While new home loan borrowers can further heave a sigh of relief, old borrowers will have to wait for a little more.

If the banks decide to reduce the lending rates, it will benefit the new home loan borrowers immediately.

However, old borrowers who took floating home loan on Marginal Cost of funds based Lending rate (MCLR) might have to wait till the reset period gets over.

Generally, banks give options to borrowers to reset MCLR linked home loans after a period of 6 months to a year.

Banks switched to MCLR as their new benchmark lending rate from June last year, replacing the base rate system for new borrowers.

It is calculated on the marginal cost of borrowing and return on net worth for banks. It was introduced by RBI to ensure fair interest rates to borrowers as well as banks.

What happens to floating home loan borrowers?

Assuming that a person has taken home loan of Rs 20 lakh at fixed interest rate of 8.5 percent for 20 years, the borrower will have to pay Rs 34 lakh as interest and Rs 20 lakh principal amount. In total the borrower will have to pay Rs 54 lakh to the bank.

In this scenario, the borrower's monthly EMI will be set at Rs 22,500 .

Now supposedly, the banks reduce the home loan rate by 0.25 percent, the borrower will have to pay Rs 33 lakh as interest and principal amount of Rs 20 lakh. In total the borrower will have to pay Rs 53 lakh to the bank.

In this scenario, the borrower will have to pay the monthly EMI of Rs 22,083. Hence the the borrower will save Rs 417 on his/her monthly EMI.

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