RBI maintains status quo on rates: Is this good news for borrowers?

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As a borrower, here's what you can do reduce your EMI (equated monthly instalment) burden.
The Reserve Bank of India (RBI) may have kept key policy rates unchanged yet again, but how this will impact the borrower depends on what the banks will do going forward.

This is the second time in a row that RBI has maintained status quo on interest rates; before this it had raised the repo rate twice by 25 basis points (bps) during its bi-monthly monetary policies held in June and August 2018. One basis point is one hundredth part of percentage.
With the apex bank raising rates twice during the course of a year, banks, too have hiked interest rates on loans. According to a Kotak Institutional Equities report, dated November 21, 2018, marginal cost of funds-based lending rates (MCLR) have continued to rise- 25 bps since June and 35 bps since March of 2018. MCLR refers to the minimum interest rate that a bank will charge on the loan; it cannot lend money below this rate.

And mirroring the RBI, interest rates on loans have remained flat on a month-on-month basis in October. So, with RBI keeping key rates unchanged, we will have to wait and watch to see what banks will do with interest rates -- Will they hike rates further or keep them where they are?

For the moment, as a borrower, here's what you can do to reduce your EMI (equated monthly instalment) burden.

Existing borrowers
A) With loans linked to MCLR rates

For a borrower who is servicing a home loan linked to MCLR, the hike in EMI will be felt when the reset date of the loan arrives. Usually, a bank offers home loan with a reset period of six months or one year. Therefore, the interest rate gets repriced as per market conditions under the MCLR regime.

Suppose you have taken a home loan linked to MCLR from SBI in November 2017 with a reset period of one year. On the reset date in November 2018, your EMI will rise by Rs 591 per month.

Home-loan-calculations
Source: Myloancare.in

Now, suppose you do not want to increase the EMI amount and want to up the tenure of the home loan instead. Here, the tenure will increase by one year and two months. This will be after paying EMI for one year between November 2017 and November 2018. Effectively, the increase in tenure will be by two years and two months, making it tenure of loan of 27 years and two months.

Gaurav Gupta, co-founder & CEO, Myloancare.in says, "Existing borrowers should try prepaying their loans as this will help to bring down the principal amount and also lessen the interest burden." But remember to check the charges on prepayment of loans and process with the lender.

"Alternatively, borrowers can opt to increase the tenure of their loans to keep the same level of EMIs every month. This can help the borrower to ensure that the household budget is not disturbed," says Gupta.

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Another option available with borrowers is to shift their home loan to a different lender to avail a lower interest rate, adds Gupta.

b) With loans linked to base rate
For those borrowers whose home loan is still linked to base rate or benchmark prime lending rate (BPLR), you can consider switching your existing home loan to MCLR-based regime. With effect from October, 1, 2018, SBI has increased the base rate to 9 per cent and BPLR to 13.75 per cent- an increase by 5 bps in both cases.

Gupta says, "Borrowers whose home loans are still linked to base rate or BPLR should consider switching it to MCLR-based regime. As per RBI mandate, banks are mandatorily required to shift their base rate and BPLR-based loan accounts to MCLR based regime. Also, MCLR offers transparent mechanism of transmission of policy rates as compared to base rate mechanism."

New borrowers
As a new home loan borrower, you can take advantage of the Pradhan Mantri Awas Yojana (PMAY), if you are eligible. The scheme offers credit-linked subsidy based on your income group under its flagship programme 'Housing for All'. To avail this subsidy, there are some eligibility criteria that must be satisfied by you.

Remember the deadline to avail the benefit under PMAY is March 31, 2019 unless the government extends it.

Also Read: Everything you need to know about PMAY

Gupta says, "In a rising interest rate scenario, new borrowers should opt for the loan amount that they can comfortably service, keeping a buffer for any further increase in loan rates."

Investing in fixed deposits
Banks have not only been increasing MCLR, fixed deposit (FD) rates, too, have been steadily rising over the past year. According to the Kotak Institutional Equities report, term deposit rates have gone by 20 bps on average between November 2017 and March 2018. However, rates have remained flat since then - it has increased marginally by 12 bps until September 2018.

Just a week before the RBI monetary policy, banks like SBI, ICICI Bank and Allahabad Bank raised interest rates on FDs across various tenures. Further, according to an Economic Times report, banks are likely to raise the deposit rates in order to meet growing credit demand.

Anil Rego, Founder & CEO, Right Horizons says, "Investors should not be looking at the interest rates offered on FDs from the short-term basis due to changes in the RBI's monetary policy. One can look to start investing in FDs once the interest rates offered by quality banks (such as SBI, HDFC Bank) are above a certain level that the investor is comfortable with; say, 8%."
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