Are Lower Interest Rates Helping The Home Buyers?

Since demonetisation, nearly all major banks and finance companies are competing to offering the cheapest home loan interest to homebuyers. While public lenders Punjab National Bank, Union Bank of India and State Bank of India (SBI) have announced a massive cut in their benchmark lending rates in the new year, private lenders such as HDFC, ICICI, Kotak Mahindra have also slashed their Marginal Cost of Fund-based lending rates for new and existing buyers. But does the reduced interest rate actually help home buyers anyway?

Limited relief for existing buyers

Reduction in interest rate is usually for new borrowers. In case existing buyers are also covered by a bank, those whose loans are linked with the MCLR benchmark get benefitted only after the reset date which is usually one year. So, if the bank is announcing the interest rate cut from April 1, 2017, but the reset date of the lending rate is September 30, 2017, an existing buyer continues to pay the old rates even when the lending rates have changed. Even for first-time home buyers, the offer is usually valid for first six months. After this period, the borrower can either switch the lender or continue to be linked with the same bank on MCLR loans.

Also read: SBI Home Loan Interest Rates Slashed, New Borrowers To Benefit

EMIs remain same

Whenever a bank cut its interest rate, the benefits of which are extended to existing buyers as well, the total monthly outgo does not come down. Generally, the bank would shorten the loan tenure. For instance, if your tenure was 25 years for a Rs 75-lakh loan at 9.15 per cent interest, after a 50 bps revision in rates, the tenure might be brought down to 22 years.

Higher cut means lower savings

As the cost of borrowing comes down, the interest rate on term deposit also comes down. That means money that buyers put in the bank for savings fetch less interest, ultimately hitting a buyer's financial status. Recently, SBI reduced its term deposit rate by 50 basis points, which was preceded by slashing of the interest rate by 20 basis points. Hence, as the cost of borrowing goes down, earning on the savings also gets impacted as banks have to maintain the liquidity and cash ratio.

Also read: Is House Price Or Interest Rate More Important?

Might result in price rise

With the cheaper rate of borrowing, the number of application for home loan goes up, ultimately indicating that the housing demand tends to increase. The rising demand gives way to increasing the property prices which apparently impacts buyers as they have to pay more because of easy availability of funding. 

Also read: Ways To Trim Down Interest Rate On Your Home Loan