Understanding Option Chain

Impact of Base Rate Cut on Home Loans

Base Rate
Base Rate

Impact of Base Rate Cut on Home Loans is the hot topic these days. RBI surprised twice by out of cycle Repo Rate cuts of 25 basis points each or 0.25%, Banks were reluctant to cut Base Rate. Despite the public displeasure of both RBI and the Govt, Banks stood firm on their stand. As i highlighted in my post that RBI is King without Kingdom, a very little can be done by RBI in this regard. Rather i will say, its a cartelization similar to that of Telecom and Airline Companies. Only 2 banks i.e. Union Bank of India and United Bank of India cut the base rate to benefit customers. As these banks are minnows in Home Loan segment, therefore, there was no impact in Home Loan Segment. The big question is when there was an increase in Repo Rate, Banks were proactive to increase the Base Rate. If the increase in cost of funds is almost in proportion to an increase in Repo Rate then why it is not decreasing in same proportion.

Banks bow to RBI Pressure” reads the headline of one of the leading business newspaper. Just to ease off the pressure from RBI and Govt, banks have announced notional cut in the Base Rate. After Repo Rate cut by 0.5%, SBI and HDFC announced rate cut of only 15 basis points i.e. 0.15%. ICICI Bank reduced its Base Rate by 25 BPS i.e. 0.25%. In the words of RBI Governor, “Banks are sitting on money. Their Marginal Cost of funds has fallen. The notion that it hasn’t fallen is nonsense“. What it implies is that banks are not willing to reduce the Base Rate. The sole objective of banking operations is to increase profitability / margins. It’s a double whammy for customers firstly, the banks increased service charges to justify the cost of service. Secondly, banks are not reducing the interest rate to improve their profit margins. Moreover, it provides a perfect opportunity to non-performing banks to wash their sins as without doing anything their bottom-line improve. In short, it improves the balance sheet of bank. It will be right to conclude, the customer is paying for the operational inefficiency of the bank. In this bargain, The biggest loser is “CUSTOMER“.

After recent Base Rate cuts, there is a moment of joy and celebrations among the Home Loan Borrowers in anticipation of a cut in Interest Rate. There is no doubt that benefit will be passed to the both new and existing customers. The impact for existing bank customers will be direct and for new customers it will be more of notional. There is another segment who have availed Home Loan from Housing Finance companies. HFC Home Loan customers will get the least benefits in current euphoria. I will cover all 3 segments in following sections.

Impact of Base Rate Cut – Existing Customers

Its party time for Existing customers, they will get direct and absolute benefit from the base rate cut. For example, if my Home Loan is with State Bank of India at 10.15%. Break up of 10.15% is Base Rate + Mark up. Before the cut, the Base rate of SBI was 10% therefore, my interest rate was 10% + 0.15% (Mark up). After base rate cut of 0.15%, my revised interest rate will be 9.85% + 0.15% (Mark up) = 10%. Existing ICICI Bank customers will benefit the most. ICICI Bank reduced Base rate from 10% to 9.75%. If i availed, ICICI Bank Home loan in last 6 months or so then my markup would have been 0.15%. Therefore after the base rate cut, my revised interest rate will be 9.90% i.e. 9.75% + 0.15% (Mark-Up).

As i always mention that Indian banks are street smart. Hats off to the banks. The timing of base rate cut is quite smartly planned. Under Home Loan agreement, the interest rate of a customer is reset on the quarterly basis. For most of the customers, reset dates are 1st April, 1st July, 1st Sep and 1st Jan. For Home Loan Customers, the new rate of interest i.e. benefit of the base rate cut will be implemented from 1st July. Therefore again, poor customer has to pay higher interest rate for 3 more months i.e. April, May and June. Had the banks cut the base rate on or before 31st Mar then the interest rate would have been reduced from 1st April. Banks deliberately held back the announcement to reap the benefits for 3 more months :).

Impact of Base Rate Cut – New Customers

Nothing much to cheer for New Customers. Banks will tweak the markup on base rate to control the interest rate offered to new customers. For example, if all banks decide that new customers will be offered interest rate of 10% (Remember Cartelization). In this case, banks will increase / decrease / retain the markup on base rate. Say ICICI Bank is currently offering mark up of 0.15% before the rate cut. After rate cut, to offer 10% interest rate to new customers, the bank will increase the markup from 0.15% to 0.25%. Therefore new customers will get home loan at 10% i.e. 9.75% + 0.25%. Similarly, for SBI there will not be any change. Current markup is 0.15% therefore after reduction in Base Rate from 10% to 9.85%, interest rate for new customers will be 9.85% + 0.15% = 10%.

All the freebies like waiver of processing fees etc will be withdrawn. Also, note that customers whose loan is already sanctioned or signed Home Loan agreement recently, they will not get benefit from any change in markup/reduced rate for new customers. They will be treated as existing customers and have to wait till 1st July to get the benefit of reduced base rate.

Impact of Base Rate Cut on HFC Customers

There is no direct impact. Customers who availed Home Loan from Housing Finance Companies is most unfortunate lot. I received numerous queries specially “HDFC Bank has cut Base Rate from 10% to 9.85%. From when my HDFC Home Loan interest rate will reduce”. As i always mention that loan from HDFC is not from HDFC bank but from HDFC Ltd. HDFC Ltd follows RPLR as benchmark whereas Banks follow Base Rate as the benchmark for Loans. I explained it in my post on Floating Home Loan: BPLR vs Base rate. In short, HDFC Bank Base rate reduction will not have any direct impact on HDFC Ltd Home Loan Customers.

Housing Finance Companies will reduce interest rates but not immediately. One of the reason is a high cost of funds for HFC’s. The cost of funds for banks will always be lower than HFC’s because of CASA funds. In order to remain competitive, interest rates for new customers will be reduced by increasing spread on RPLR / BPLR. Interest rates of existing customers will remain same due to the high cost of funds. Existing customers will not be benefited till BPLR / RPLR is reduced. Existing customers should not expect any immediate relief.

As we know, it is easier to get loans from HFC’s, legal checks are not stringent and disbursement is high due to the inclusion of stamp duty and registration charges in cost of a property. In this case, Customer is willing to pay the interest rate premium because of these convenience factors. Therefore, any benefit due to low cost of funds will not be passed immediately though increase is proactive.

As the food inflation is on the rise, therefore don’t expect another repo rate cut from RBI soon. Be happy with the notional base rate cut and hope for good salary hike so that home loan can be closed asap :)

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Suman
Suman
9 years ago

Hi Nitin,

Good Day! and many thanks for the elaborated explanation. I have a home loan from SBI (suctioned on Nov, 2014). Interest rate was 10.15%. Today (13-04-2015) I during online banking, I noticed that in my case the rate is revised to 10%. But in news paper, I read that the rate will be 9.9%.
In your explanation, we have told that my revised interest rate will be 9.85% +0.15% (mark up) i.e. 10%.
I am little bit confused. What is the mark up? What should be my revised interest rate, 10% or 9.9% ?
Please advice.

Regards
Suman

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Suman

As your mark up is 0.15% therefore your revised interest rate will be 10% i.e. 9.85% + 0.15%. SBI has reduced the mark up for new customers from 0.15% to 0.05% therefore for new customers interest rate offered is 9.90% i.e. 9.85% + 0.05%.

Suman
Suman
9 years ago
Reply to  Nitin Bhatia

Hi Nitin,

Thanks for the kind reply. Is it possible to reduce the mark up charge in my case?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Suman

It is possible but at the sole discretion of bank. You may check with bank.

Jayant
Jayant
9 years ago

Hi Nitin,
I have one question. I have recently submitted a prepayment check from ICICI account to HDFC Home loan. I made a slight mistake in the signature. My bad :(. check clearance department rejected this check. I checked with HDFC and they told me I will have to pay penalty for that and also interest amount will be increased i.e. on 6th I paid Rs 3000 as interest for first 6 days and on 20th, when I submit a new check with correct signature, I will have to pay interest upto 20. Previous amount will not be valid any more.
From your experience, can you tell if there is any way I can convince them not to increase interest amount and consider the new check submitted on 6th instead of 20.
THank you

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Jayant

It is not feasible. You have to pay interest till 20th.

Rajeev
Rajeev
9 years ago

Hi Nitin, thanks for your insightful articles. Unfortunately I had taken an HDFC home loan as at the time of buying the house there was no other bank which was giving loans for the property. After taking the loan SBI also came into the picture and they also are giving loans for the property. So the situation is that despite the total of 0.5% cut in the rates by RBI, HDFC has said that RPLR was reduced by .20 % on 13 / 4 /2015 . My current Rate of interest is running 10.5 % ,it will reduce by .20 % once my Quarter cycle will complete- which like you said is a cunning way to pain the customers. so my new rate after the cuts would be still at 10.3%!!
They are offering conversion to a 9.9% rate if I pay conversion Fees of 0.25% OR Rs 15000 plus service tax (whichever is lower) is payable on the outstanding balance at the time of conversion which comes to Rs. 16854/- . this is a very high amount and since I haven’t taken the full loan disbursement yet, it is cheaper for me to continue at the current rate, till the entire loan disbursement happens in approx. a years time. What do you suggest? if my loan currently is only 20 lacs then do I not go for a switch to a lower rate till the whole amount gets disbursed and hopefully some more rate cuts might have happened by that time–maybe in Dec 2015 or Jan/Feb 2016? Is there something that I am missing that these HFCs have already thought about and will surprise me with some new fees when I do this at a later date? Is there some place that I can go to complain on this issue? NHB? thanks.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Rajeev

Complaint to NHB will go unnoticed. I will not suggest to waste your time. I suggest you to wait till July before taking final call in this regard. There is a wide spread anticipation of another rate cut in June’15 RBI policy review.

To confirm whether it is financially beneficial or not, you should do cost benefit analysis as it depend on multiple factors. From the details shared by you, i cannot conclude whether you should go ahead or not.

sreenath thotamsetty
sreenath thotamsetty
9 years ago

Hi Nitin,

As i understand from ICICI bank they will calculate on monthly basis and in one of the part payment letter they mentioned as below

“For purpose of calculation of Interest / further interest (additional interest) & other charges, the basis, applied by the Bank is 1/12 applied monthly”.

When i called ICICI customer care they mentioned that the rate cut applies from 10-Apr onwards and their systems need to update with new rate and accordingly they will send revised letters to all existing customers.

Thanks,
Sreenath

Nitin Bhatia
Nitin Bhatia
9 years ago

You may wait for revised communication from bank for more clarity.

Ashish
Ashish
9 years ago

Hi Sir,
HDFC has reduced its ROI to 9.90% and I availed loan last year at 10.25%. Do you suggest that i should get my margin reduced? I recently made pre-payment and at that time ROI was 10.15% so asked bank employee to reduce my ROI however he advised not to do so as the difference was very low. Should i do it now?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Ashish

There will be another round of cut in next month or so. I suggest you to wait till then.

Ashish
Ashish
9 years ago
Reply to  Nitin Bhatia

Thanks Sir, I will wait then..:)

Ashish
Ashish
9 years ago
Reply to  Ashish

Hi Sir,
With the value of Rupee fallen these days, do you suggest that i should wait further to reduce my ROI with HDFC. Its currently at 9.90% and I availed loan at 10.25%.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Ashish

It is all speculative. I will still suggest to wait

Ashish
Ashish
9 years ago
Reply to  Nitin Bhatia

Hi Sir,
I just came to know that HDFC is reducing ROI from 10.25% to 10.05% automatically with no charge however in order to further reduce to 9.90% I need to pay the conversion fee of around 5500/- Do you suggest i should pay fee for reduction of 0.15%. Thanks.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Ashish

You may wait for 1 month as there is wide spread speculation that RBI will reduce Repo Rate on 2nd June. After that there will be one more round of rate cut then you can pay conversion fees to reduce your ROI.

chandramohan harkude
chandramohan harkude
9 years ago

Hi Nitin,

I have home loan with Bank Of India I took loan on 2008 feb at the time the intrest rate was(floating) 8.8%

Now I enquired what is my current intrest rate then, they told it is now 11.20% . I discussed this issue with one of my friends and he took loan from SBI at the same time 2008 and his current intrest rate is(floating) 11.25%, Why banks increasing the home loan after 3 years??

please guide me whether i have to continue with Bank Of India or transfer to HDFC or SBI which are ready to transfer with intrest rate 9.90 %(floating)

Nitin Bhatia
Nitin Bhatia
9 years ago

Seems your home loan must be linked to BPLR / RPLR of the bank. First you request bank to link your Home Loan to base rate of the bank by submitting application on plain paper. There are no charges for same. Once your loan is linked to base rate then you may ask bank to reduce your Home Loan interest rate. Bank may charge 0.5% of outstanding balance as re-pricing fees or conversion fees which you should pay.

Home Loan transfer should be last option.

sreenath
sreenath
9 years ago

Hi Nitin,

Is there any change in interest rates again in Jun

Thanks,
Sreenath

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  sreenath

Yesterday SBI has cut the base rate by 15 basis point. Others will follow the suit. Wait for 2 weeks.

Parthasarathi Rana
Parthasarathi Rana
9 years ago

Hi Nitin,
Do the existing customers also get the benefit from SBI home loan cut or do they have to pay certain amount for reducing the interest rate?

Thanks
P Rana

Nitin Bhatia
Nitin Bhatia
9 years ago

It depends on current mark up over base rate.

Pradeep S
Pradeep S
9 years ago

Hi Sir
I am planning to buy a property in Chennai which is approved by HDFC Ltd.
Following the RBI rate cut, do you think HDFC will also cut the BPLR?

Should I wait for couple of more weeks before going for the home loan?

Regards
Pradeep

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Pradeep S

It cannot be predicted. It depends on cost of funds for HDFC Ltd.

Rakesh Gowda
Rakesh Gowda
9 years ago

Hi Nitin,

I have a home loan( SCB Home saver home loan linked to a savings account) with Stan Chart. I have two questions…

I recently got my rate revised from 13.25 % to 10%.

1] have an option to switch from MVRR/BPLR to base rate, should i go for it?
2] I was planning to make a part payment of 3L. Since its a savings linked home loan bank suggest that I park those funds in the savings account linked to the loan so that I don’t get charged on principal. Should I make the part payment or keep money in the savings a/c linked to the loan?

Please let me know.

Rakesh

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Rakesh Gowda

1. Yes
2. You may keep money in your savings a/c linked to Home Loan

Rakesh
Rakesh
9 years ago

Hi Nitin I have a query,
I have taken a home loan of 17.7 lacs from DHFL , It started from 2010 and final disbursement happened in 2013 as it was an construction linked plan. My interest rate which was 9.5 % in 2010 is no 11.75 % as of Aug 2015, currenty 141 months are remaining for the loan tenure.
HDFC ltd is offering at 9.9% to take over. I talked to DHFL , who are ready to reduce the interest rate to 10.25 with a fee of 3000/- .
Pl suggest which one will be more beneficial .Thanks and Regards

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Rakesh

I will prefer HDFC between two.

Amit Kumar Gupta
Amit Kumar Gupta
9 years ago

Hello Sir
I took home loan of 6 lacs from Hdfc Ltd in Nov.2015 @10.15% which is now 9.95% due to reduction in RPLR rate.now,Sbi is offering takeover @9.75% without processing fee.plz suggest whether it’s better to go for loan transfer or not?

Amit Kumar Gupta
Amit Kumar Gupta
9 years ago

Hello Sir
I took home loan of 6 lacs from Hdfc Ltd in Nov.2014@10.15% which is now 9.95% due to reduction in RPLR rate.now,Sbi is offering takeover @9.75% without processing fee.plz suggest whether it’s better to go for loan transfer or not?

Nitin Bhatia
Nitin Bhatia
9 years ago

You may wait for 2-3 weeks before you decide till HDFC further revise RPLR after RBI’s repo rate cut.

Govind Maheshwari
Govind Maheshwari
9 years ago

Dear Nitin,

I have a Home Loan of INR 22L with SBI which started in Nov 2011 @10.25%. The last disbursement was made in 2013 (around June/July). Currently, the Rate of Interest for my loan is set @10.2%.

I have the following 2 queries wrt to my Home Loan,

1. As RBI has reduced the Repo rate by 175 basis points (b/w Oct 2011 & Sep 2015) should the banks (in my case SBI) not pass the benefit to the existing customers? I believe, a reduction of even 100/75 basis points would be quite significant.

2. As SBI is not passing any benefit to the existing customer, is it worth transferring the loan to some other institution? (still another 21 years to go.) If yes, please guide the best institution in the current scenario?

regards,
Govind

Nitin Bhatia
Nitin Bhatia
9 years ago

1. A reduction in REPO rate doesn’t necessarily mean direct reduction in your Home Loan Interest rate. As and when bank will reduce base rate, your home loan interest will be reduced. Yesterday SBI has cut base rate by 40 bps w.e.f 5th Oct therefore your interest rate will 9.8% from the interest rate reset date on or after 5th Oct.
2. I will not suggest. Your interest rate will be 9.8% from next reset date. Depending on interest rate offered to new customers from 5th Oct. You can further reduce your interest rate from 9.8% by paying conversion fees.

pankaj shukla
pankaj shukla
9 years ago

Hi Nitin,
In June I took 18 laks loan from icici bank for 15 yrs. (9.90%) with base rate 9.70%. Now base rate is reduced to 9.35%. So will my Emi or Time period will go down automatically. Please suggest what needs to be done. Do they charge any conversion fees. Whome should I contact to bank or customer care?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  pankaj shukla

Your rate of interest will decrease to 9.55% on next reset date. No action required from your end and there is no conversion fees for same.

pankaj shukla
pankaj shukla
9 years ago
Reply to  Nitin Bhatia

Thanks for response. When will be the next Reset date. Loan agent was telling me I need to visit the branch. So when rate will go to 9.55 % does it mean EMI or Time period will be automatically removed? or we need to confirm with Branch. Please suggest

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  pankaj shukla

Next reset date must be mentioned in your Home Loan action. As u mentioned, no further action required from your end.

Bixapathi
Bixapathi
9 years ago

sir, I have a quick question, Can we bargain for a lower markup while taking a home loan? For example SBI’s markup was 0.05% till september and now it is 0.25%. So can I ask for getting a markup of 0.05% now if I take home loan?

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Bixapathi

It is highly unlikely.

Atul
Atul
9 years ago

Hi,
As HDFC cut his base rate by 0.25 bp at 4 oct 2015 (3rd Quarter Satrt from 1st Oct), then the impact of rate changes will shown in my loan account is right now or from next Quarter.

Nitin Bhatia
Nitin Bhatia
9 years ago
Reply to  Atul

Next Reset Date as per home loan agreement.

Krishnan
Krishnan
8 years ago

Hello Nitin,

I availed a home loan from HDFC Ltd. Now they announce that they are reducing the interest rate from 9.70% to 9.55% for exisiting customer and for the rate reduction, fee has to pay around Rs.6000/- (they showed me some calculation of BPLR & Yields, little cumbersome to understand their process, even the executive didn’t understand well on this). They told me if i pay 6k, they will cut 2 months from the tenure period (as I have another 18 years to go). I don’t see any benefit in this (i mean 6k for 2 months & what if interest rate will increase after 3 months), would you recommend any suggestions.

Regards,
Krishna

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Krishnan

I suggest you to wait till April before you accept any such offer. The interest rates are expected to fall.

Thirunavukarasu Kathirvel
Thirunavukarasu Kathirvel
8 years ago

Hello Sir,
On April 6th, RBI reduced the repo rate further by 25 bps. I would like to know why the banks have not passed on the benefit to customers. Similarly when the small savings deposit interest rates was reduced, there was expectation from the banks to reduce the interest rate. I would like to know whether we can expect reductions in home loan interest rates in another one or two months.

Nitin Bhatia
Nitin Bhatia
8 years ago

It takes time to pass the benefits of interest rate cut. You can expect a rate cut in couple of months. Else you can link your home loan to MCLR.

Keshav
Keshav
8 years ago
Reply to  Nitin Bhatia

I’ve an existing home loan in ICICI with 9.55, I tried moving to MCLR but rate rate of interest will not change. ICICI bank FAQ suggest the same

For Reference :

All existing customers has an option to switch from the existing system of FRR/PLR/I-Base (FRR/PLR/I-Base +/- spread) to the new system of I-MCLR-1Y (I-MCLR-1Y + spread) without changing the effective rate of interest. No switch fee would be charged for this option. The effect of conversion in the system, from existing system of FRR/PLR/I-Base to new system of I-MCLR-1Y, will be provided on an immediate basis.

Illustration: If an existing customer with loan amount of ₹ 2.5 million is at 9.55% p.a. effective ROI (I-Base + 0.20%) and if the customer opts to switch-over to I-MCLR-1Y then the Adjustable Rate Home Loan (ARHL) interest rate will become (I-MCLR-1Y (9.20%) + spread (0.35%)) equivalent to 9.55% p.a..

Thus, the effective rate will continue to remain same at 9.55% p.a. with spread applicable on the loan being adjusted.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Keshav

Any benefit of MCLR will be prospective in nature and migration from Base Rate to MCLR will be not increase/decrease existing interest rate.

Learner
Learner
8 years ago

Hello Nitin,

Following are my loan details:

1. Outstanding loan amt: 14 lacs
2. Bank: Bank Of India
3. Tenure remaining: 89 months
4. EMI per month is 21100
5. Floating interest rate: 10.2%

I have two questions:

1. Should I switch my loan to the new banks offering lower rates to save some money? I checked the online calculators for balance transfers but most of them are suggesting to stay with my current bank. I could be wrong as well. So just want your expert advise.

2. My bank is offering to pay 0.25% of outstanding amount and lower the interest rate to their current base rate at 9.7. In this case, do they give rebate of all previous years as well? i.e. from the period since lower base rate came in effect.

Also, I have already given application to bank to reduce my home loan rate to their current base rate at 9.7 in this month. But when I enquired today, they said for now they are not granting anyone to opt for this and asked me to wait for some time. His answer was not satisfactory. I want to if he is lying? How would I know if they have started passing benefits to their existing customers? They changed their base rate on 05.10.2015 but still haven’t passed it to their existing customers.

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Learner

You may transfer to SBI or ICICI Bank.

Learner
Learner
8 years ago
Reply to  Nitin Bhatia

How much I can save with transfer? Could you please provide me the calculation if you can with SBI’s or ICICI’s current interest rate?

Nitin Bhatia
Nitin Bhatia
8 years ago
Reply to  Learner

Any personalized consultation is available on paid basis. You may avail one time advisory service for the same. Please check following link
https://www.nitinbhatia.in/advisory-service/

BJ
BJ
7 years ago

Why don’t you write the date of your article. Without date, it becomes impossible to know whether the article is fresh or stale, or in other words, impossible to determine whether the article is relevant or irrelevant in the present context.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  BJ

The information shared is generic in nature and relevant today irrespective of the date of the post.

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