RBI rate cut may help the home buyers
In the third bi-monthly financial policy statement, as expected by the business the reserve bank of india (RBI) cut the policy rates by 25 basis points. The repo rate currently stands at 6 June 1944 which is the lowest within the past seven years. As a result, one in every of the direct implications of this move is anticipated to be cheaper loans for borrowers. However will rate cuts alone facilitate revive the property sector in India?
Just few weeks ago one of the largest banks in the country, State Bank of India (SBI), had cut its saving bank account rate from 4% to 3.5% per annum, indicating an expected downtrend in interest rates. In the past when SBI had lowered its lending rates, other leading banks had followed.
Every bank offers loans at different interest rates. The current lending home loan rate from leading banks ranges between 8.4 to 8.6%. Depending on the loan to deposit ratio many banks are expected to cut their home loan rates and in coming months lending rates might fall in the range of 8.2 to 8.5% per annum.
Let’s do a simple calculation to understand how much would a borrower save with this approximately 0.2% cut in home loan interest rates. For a INR 30 Lakhs loan for a tenure of 20 years a borrower would pay in total (Principal plus interest) INR 62,48,327 when paying EMI at 8.5% interest. For the same amount and tenure at a 8.3% home loan interest rate he would be paying INR 61,57,488. This difference of INR 90,839 over a 20 year time frame is not significant, but it is still counted as saving. This coupled with expected marginal reduction in property prices post GST, would have a high impact on property prices.
Usually the banks offer lower interest rates only for fresh loans. Existing borrowers should also make calculations to check if it makes sense to shift their loan account to another bank offering lower interest rates or renegotiate with the existing bank for a reduced interest rate.
What should property seekers do in the current market?